New deal creates UK's biggest telecom operator

London: Telefonica and Liberty Global have agreed to create the UK's largest phone and internet operator, threatening their rivals and marking another industry-defining deal for billionaire John Malone.

The deal values the combination of Telefonica's O2 with Liberty's Virgin Media at 31.4 billion pounds ($39 billion). The companies said in a statement Thursday they plan a joint venture with equal stakes that will account for Virgin's higher value - and debt load - with a payment to O2.

The transaction is a chance for both parent companies to rework two mid-tier rivals into a fully-fledged competitor to BT Group Plc in so-called "converged services", which combine fixed and wireless phone, broadband and television. It is also one of the largest deals since COVID-19 was declared a pandemic in early March.

The transaction values O2 at 12.7 billion pounds and Virgin at about 18.7 billion pounds. The Spanish parent has been weighed down by about 38 billion euros ($41 billion) of borrowing. The arrival of new funds, including a 2.5 billion-pound equalization payment, could give its deleveraging efforts a boost.

Worked out the sharing

Each company will name half of the eight-member board, which will have a chairman who will rotate every two years. The deal is set to be completed in mid-2021.

The announcement is the latest deal for John Malone, Liberty's billionaire chairman, who has been on a relentless M&A spree since selling cable provider Tele-Communications Inc. to AT&T Inc. for $48 billion in 1999. His track record took a knock late last year when his effort to sell UPC Switzerland for $6.4 billion fell apart.

For Telefonica Chairman Jose Maria Alvarez-Pallete, it's also an opportunity to signal to investors he's committed to restructuring the debt-laden company.

Terms of the alliance

By joining with Liberty in the UK, Telefonica puts Vodafone Group Plc in a difficult position. It deprives it of a potential partner that could have set it on the road to offering consumers fixed-line services wrapped into lucrative bundles at a national scale.

And Virgin will no longer need to pay it for mobile wholesale access. That's something Liberty would have needed to keep doing to capture potential new revenue streams from the next generation of wireless technology, such as the proliferation of smart devices. 

While a potential IPO could provide "transparency" on the value of the new venture, the two companies aren't "entering the deal with the idea of leaving," Fries said i. He added the transaction is a huge vote of confidence in the UK, in spite of the uncertainties surrounding Brexit, which will "occur, and everyone will manage their way through it."

The tie-up comes at a crucial moment for Virgin. Rival BT is the only UK operator to own both a mobile and fixed network, and it's been investing to upgrade to fiber optic broadband.

This threatens one of Virgin's key selling points - the speed of its internet services. It also gets a partner with significant experience in convergence and building and operating fiber networks.

The merger means O2 can grow beyond the mobile-only market in which it currently operates.

"We think this deal will trigger a ripple effect on the UK market," said Kester Mann, analyst at CCS Insight. "Vodafone, Three, Sky and TalkTalk will all be assessing their positions and further deal-making can't be ruled out."