O2 and Virgin Media Set To Merge

  • 50-50 joint venture brings together Virgin Media, the U.K.’s fastest broadband network, and O2, the country’s largest mobile platform
  • Combination creates a stronger fixed and mobile competitor in the U.K. market, supporting the expansion of Virgin Media’s giga-ready network and O2’s 5G mobile deployment for the benefit of consumers, businesses and the public sector
  • Fully converged platform will put customers first and have the scale to innovate in the changing digital landscape, investing £10 billion in the U.K. over the next five years
  • Joint venture expected to deliver substantial synergies valued at £6.2 billion on a net present value basis after integration costs, and equivalent to cost, capex and revenue benefits of £540 millionon an annual basis by the fifth full year post-closing
  • Attractive valuation for both businesses, with O2 valued at £12.7 billion and Virgin Media valued at £18.7 billion, both on a total enterprise value basis. O2 to be transferred into the joint venture on a debt-free basis, while Virgin Media to be contributed with £11.3 billion of net debt and debt-like items2
  • Both parties expect to receive net cash proceeds at closing following a series of recapitalizations that will generate £5.7 billion in proceeds for Telefonica and £1.4 billion for Liberty Global (after an equalization payment to Telefonica of £2.5 billon3)
  • Joint venture will target ongoing net leverage of 4.0-5.0x, with proceeds from any future free cash flow generation and financing to be distributed equally between Telefonica and Liberty Global
  • The transaction is expected to close around the middle of 2021 and is subject to regulatory approvals, consummation of the recapitalizations, and other customary closing conditions
Telefonica Chief Executive Officer, Jose Maria Alvarez-Pallete, said, “Combining O2’s number one mobile business with Virgin Media’s superfast broadband network and entertainment services will be a game-changer in the U.K., at a time when demand for connectivity has never been greater or more critical. We are creating a strong competitor with significant scale and financial strength to invest in UK digital infrastructure and give millions of consumer, business and public sector customers more choice and value. This is a proud and exciting moment for our organisations, as we create a leading integrated communications provider in the U.K.”
Mike Fries, Chief Executive Officer of Liberty Global, said, “We couldn’t be more excited about this combination. Virgin Media has redefined broadband and entertainment in the U.K. with lightning fast speeds and the most innovative video platform. And O2 is widely recognized as the most reliable and admired mobile operator in the U.K., always putting the customer first. With Virgin Media and O2 together, the future of convergence is here today. We’ve seen the benefit of FMC first-hand in Belgium and the Netherlands. When the power of 5G meets 1 gig broadband, U.K. consumers and businesses will never look back. We’re committed to this market and are right behind the Government’s digital and connectivity goals.”

Strategic Combination

Liberty Global plc (NASDAQ: LBTYA, LBTYB and LBTYK) and Telefonica SA (Madrid stock exchange: TEF) today announced an agreement to merge their operating businesses in the U.K. to form a 50:50 joint venture (the “JV”). The combination of Virgin Media and O2 will create a nationwide integrated communications provider with over 46 million video, broadband and mobile subscribers and £11 billion of revenue.4

By combining Virgin Media’s market-leading v6 video service and giga-ready broadband network, together with O2’s best-in-class, 5G ready mobile propositions, U.K. consumers will enjoy the highest-quality customer experience possible, with superior connectivity and entertainment both inside and outside the home. As a fully converged provider, the JV will provide more competition in the marketplace and choice for consumers.

In addition, the JV will become a leading challenger in the B2B space as the combination will accelerate the adoption of converged fixed-mobile services to Virgin Media’s and O2’s existing business customers and offer new services using both companies’ digital skills, networks and product portfolios, such as cloud, big data, Internet of Things and cybersecurity services. This will ensure sustainable competition in the small, medium and large business segments across the U.K., which will benefit the overall British economy.

Financial Profile of the Joint Venture5

Telefonica and Liberty Global will ensure that the JV will benefit from the scale and complementary expertise of each partner. To accomplish that objective, the parties have agreed to provide a suite of services to the JV after closing. These services will principally consist of IT and technology-related services, procurement, brand management and other support services. The annual charges to the JV will ultimately depend on the actual level of services required by the JV.

Separate financial information for Virgin Media and O2 is presented below for the 12 months ended December 31, 2019.


The JV intends to distribute available cash to the shareholders periodically and is expected to undertake periodic further recapitalizations, subject to market and operating conditions, to maintain its 4.0x-5.0x target net leverage ratio8. Between signing and closing, each party will retain the free cash flow of their respective operations. Liberty Global will transfer effectively all of its UK tax capital allowances and tax loss carry-forwards, which primarily resulted from prior infrastructure investments, at closing to be utilized by the JV. Each party will fund the deficit in their respective defined benefit pension schemes, arising from the next triennial actuarial valuation.

Neither Telefonica nor Liberty Global will consolidate the JV after the closing.

Transaction Details

The transaction will include a series of recapitalization financings prior to closing to reach its target closing net leverage ratio for the JV of 5.0x, or approximately £18 billion of long-term debt. Net new proceeds from the recapitalizations are targeted to be approximately £6 billion. After taking into account the recapitalizations, Telefonica is expected to receive £5.7 billion in total proceeds from the transaction. Liberty Global is expected to receive £1.4 billion in total, including approximately £800 million from the recapitalization of its retained and 100% owned Virgin Media Ireland business. The transaction will not trigger a change of control under Virgin Media’s existing third-party debt that will be contributed in full to the joint venture. As part of the transaction, a syndicate of banks has underwritten a £4 billion standalone undrawn financing on the O2 business.

These transaction proceeds will be determined based upon (i) equalization payments to take into account the relative valuation of the two businesses and (ii) the proceeds generated from the recapitalization transactions. With respect to the equalization payments, based upon the enterprise value of each business, and after deducting debt and debt-like items, Liberty Global will make a cash payment to Telefonica of £2.5 billion. However, this payment by Liberty Global will be offset by receipt of proceeds from the recapitalizations described above such that at closing Liberty Global receives cash proceeds from the transaction.

Synergy Opportunity

The JV is expected to generate significant operating benefits, with estimated run-rate cost, capex and revenue synergies of £540 million1 on an annual basis by the fifth full year post closing, equivalent to a net present value of approximately £6.2 billion post tax and net of integration costs, as well as significant synergies from the accelerated usage of existing tax assets.

The vast majority of the benefits relate to demonstrable cost and capex synergies, with an annual run-rate of approximately £430 million out of which approximately 80% are expected to be achieved by the third full year after the closing. The key expected sources of cost and capex synergies include:

  • Use of existing infrastructure to provide services for each entity’s customers at lower cost compared to standalone / wholesale capabilities;
  • Migration of Virgin Media mobile traffic to Telefonica UK’s network;
  • Combination of regional and national network infrastructures and IT systems;
  • Reduction in combined marketing expenditures;
  • Potential to reduce general and administration costs; and
  • Site rationalization

In addition, the JV is expected to realize significant growth through cross-selling opportunities and scale, resulting in revenue synergies with an estimated annual run-rate of approximately £110 million on an annual basis.

To achieve these synergies, the JV expects to incur approximately £700 million of integration costs, most of which should be incurred in the first four years after the closing.

With extensive track records of delivering value creation, Liberty Global and Telefonica bring significant experience in the integration and execution of identified synergies in the context of in-country consolidations and convergence transactions across Europe and worldwide.