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Virgin Media & O2's £31.4bn Merger

Updated: Dec 27, 2020

By: Sahir Patel, Astha Kothari, Vikram Sharma


Overview of the deal


Liberty Global, the owners of Virgin Media and Telefonica (owners of O2) announced in May 2020 a £31.4 billion merger deal. Telefonica and Liberty will put O2 and Virgin into a 50-50 joint venture. The purpose of the deal is to create a “national connectivity champion” able to compete with BT and their extensive cable and mobile operating network, especially since BT’s foray into consumer mobile after their acquisition of EE in 2016. The expected completion of the deal is mid-2021. But straight after the deal is completed, the new business will borrow billions of dollars whilst Telefonica will take out £5.7 billion and Liberty Global £1.4 billion.


Company Details: Virgin Media


Virgin Media is the first ‘quadruple-play’ company in the UK offering four multi award-winning services: broadband, TV, mobile and home phone. It is well-known for providing the fastest fibre-optic broadband available in the UK (152Mb). The company was originally founded in March 2006 by the merger between NTL and Telewest who then went on to purchase Virgin Mobile UK in July 2006. Then, in February 2007, the company’s services were rebranded under Virgin Media after signing a deal with Sir Richard Branson. Since 2013, it has been a subsidiary of Liberty Global plc, the world’s largest international cable company. The firm is the third largest internet service provider in the UK with a market share of 20%, not too far away from its competitors Sky and BT. Furthermore, it is the only national cable company accounting for 51% of UK households after acquiring Smallworld Cable in 2014.


FOUNDED: March 2006

HEADQUARTERS: Green Park, Reading, England

CEO: Lutz Schuler (since Jun 2019)

NO. OF EMPLOYEES: 14, 000 (31 Dec 2017)

EV (enterprise value): £18.7 bn

LTM Revenue: $11.535 billion

LTM EBITDA: $4.49 billion

LTM EV/Revenue: 1.52

LTM EV/EBITDA: 8.37



Company Details: O2


O2 is a UK mobile network operator, and is the second-largest operator in the UK (Field and Williams 2020). Originally launched in 1985 as a BT venture called Cellnet, it was eventually rebranded as O2. Telefónica acquired O2 in 2006 for £17.7bn, retaining the name and location. O2 itself continued operations as previously, providing mobile phone and network services to consumers. O2 is a trusted, reputable operator, having won the Best Network Coverage in the Uswitch Mobile Awards for the past 3 consecutive years.

Since O2 is a limited company, the following figures are for Telefónica, O2’s parent.


Founded: 1924

Headquarters: Madrid, Spain

CEO: Jose Maria Alvarez-Pallete

Number of employees: 113 800

Market Cap: €14.58 bn

EV: €73.392 bn

LTM Revenue: €47.810 bn

LTM EBITDA: €16.006 bn

LTM OIBDA: €9.41 bn

LTM EV/OIBDA: 7.8x

LTM EV/Revenue: 1.54x

LTM EV/EBITDA: 4.59x

P/E Ratio: 55.87


Projections and Assumptions


Telefónica will no doubt still be nervous about the outcome of the decision by the EU antitrust chief on whether the CMA can rule on the merger, especially since this is not their first time trying to secure an exit strategy for their UK subsidiary. In 2016, the sale of O2 to Three for £10.25bn was blocked by the European Commission over fears that the deal would promote anti-competitive behaviour in the UK mobile market.

However, the merger between a fixed-line network company (Virgin Media), and a mobile network firm (O2) may be seen as more desirable by the competition watchdog as compared to 2016, where the proposed merger between 2 mobile network operators, O2 and Three, was blocked. This is because if two mobile network operators had merged, this could have encouraged anti-competitive behaviour since they were operating in the same markets as each other prior to the merger. This would have resulted in too few competitors in the market and the joint venture having too much market share. However, since O2 and Virgin specialise in different sectors, there is less concern of the joint venture holding too much market share in either the fixed line network sector or the mobile network sector.


Should the deal be approved, Liberty Global will pay Telefónica £2.5bn in order to create equal ownership in the joint venture (Telefónica, n.d.). According to the projections of Telefónica in their statement of results for January-March 2020, they expect to receive £5.5-5.8bn after dividend recapitalisation (Telefónica, n.d.). Dividend recapitalisation is where a dividend is paid to the shareholders by an entity who raises debt to fund the dividend. It ensures early and immediate returns for Telefónica.


Short-Term Impacts


The two companies are expecting huge cost savings from ending the duplication of departments such as administration and marketing, improving productive efficiency. These cost savings could be passed down onto the consumer through cheaper mobile and home broadband prices which could potentially also attract new customers. This is especially likely as the new company will want to compete with BT and Sky.

Consumers within both firms will benefit from a wider range of products and will experience better service, improving customer satisfaction which is key in competitive markets as it helps increase brand loyalty amongst customers. Existing customers can expect a greater breadth of entertainment and faster speeds, making the merger even more attractive.


There would be value creation as a result of the deal with an estimated net present value of £6.25 billion as shown in the graph above(Telefónica, n.d.). The joint venture will result in capex and revenue synergies of £0.54 billion on an annual basis by the fifth year. Sources of these synergies include:


  • Use of existing infrastructure to provide services for both firms

  • Less marketing expenditure, lower administrative costs

  • Combination of regional and national infrastructure and IT systems




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