Ingrid Lunden

The regulators said “NO” when Telefonica tried to combine its O2 operations in the UK with rival carrier, Hutchison-owned Three, back in 2015. But Telefonica didn’t let go of the idea of divestment, and five years later, in the middle of a health pandemic with related threats of a global economic depression looming over us, comes the latest effort on that front.

Telefonica and Liberty Global today announced a plan to merge the Spanish telco’s UK mobile carrier O2 with Virgin Media, a pay-TV and broadband provider in the country owned by Liberty.

The deal is huge. Based on a valuation of £12.7 billion for O2 and £18.7 billion for Virgin media, it works out to a combined enterprise valuation of £31.4 billion, or nearly $39 billion at current rates. It will create a business with 46 million video, broadband and mobile subscribers and £11 billion of revenue, the companies said.

As a point of reference, BT — one of Virgin’s and O2’s biggest competitors on the fixed-line, broadband and TV front, which long ago used to own O2 before spinning it out — is valued at only £10.4 billion, or $12.8   billion. Vodafone — a big competitor mostly on mobile — is valued at $358.95 billion, or $456 billion, although it has vast international holdings; its UK business would represent a fraction of that.

O2 is coming into the deal on a debt-free basis while Virgin Media is bringing “£11.3 billion of net debt and debt-like items” into the marriage. The transaction, they said, is expected to close around the middle of 2021 and is subject to regulatory approvals.

The deal underscores the bigger consolidation trend that has been playing out for years, where smaller and more narrowly focused businesses are coming together with those that offer either complementary services to offer better bundles, or overlapping ones for more economies of scale.

But its timing is also very notable. As we’ve pointed out before, M&A activity has largely slowed down in the current market, but we’re still seeing deals (and funding rounds) in cases where the price is right or a business is worth keeping around and bolstering.

This deal ticks both of those boxes, but you could add a third line of reasoning, which is that we may be in a more likely moment to see these deals get a nod when they might have been scrutinised more in the past. Both Telefonica and Liberty Global have had tastes of costly M&A efforts thwarted after regulators put up flags over antitrust violations.

Vodafone’s efforts to buy Liberty Global assets some years ago pointedly did not include Virgin Media in the UK as a result of that, and of course Telefonica’s previous efforts to divest O2 in a merger with Three went nowhere, also out of competition concerns.

However, we are seeing a different tack at the moment from regulators, who have pointedly said that not only are they aiming to approve and clear faster a backlog of deals, but to give them a more open-minded treatment given the current state of the market, to keep the economy turning.

The Competition and Markets Authority outlined its updated approach in its recent decision to approve a merger between Takeaway.com and JustEat, a deal that had been in the works for months:

“During the COVID-19 outbreak, the CMA is working with businesses where it can to be flexible – for example, by recognising that there may be delays in providing the information it needs to conduct investigations,” it said at the time. “However, it is also trying to complete investigations efficiently at this time, wherever possible, to provide businesses with certainty. In this case, the CMA was able to publish its final decision 26 days ahead of the statutory deadline.”

That doesn’t mean, of course, that existing rivals will not make appeals to block or change the terms of the deal, nor that they may not themselves seek to start some M&A activity of their own in response.



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