Telefonica begins negotiations for a potential merger of O2 and Virgin Media

In an announcement on Monday, Spain’s Telefonica (EBR: TFA) said that it is considering a merger of its British subsidiary O2 with Virgin Media. The company is currently negotiating with Virgin’s parent organization, Liberty Global (NASDAQ: LBTYA).

Telefonica said that discussion is in the early stages with billionaire John Malone’s cable company.

“The process started between both parties is in the negotiation phase, with no guarantee, at this point, precise terms or its probability of success.”

Telefonica and Liberty Global to form a joint venture

O2 is the UK’s largest mobile network with 34 million customers while Virgin Media has 5.3 million users combined for its mobile, pay-TV, and broadband services. A potential merger will bring these roughly 40 million customers to the same platform.

As per the sources, the two companies are negotiating to form a joint venture with equal ownership. Telefonica originally expected CK Hutchison to take over O2 in 2016 but the deal failed to get a green light from the European competition regulators. Ever since, the Spanish telecommunications company has been exploring options for its British mobile operator.

Telefonica had also planned a £10 billion IPO (Initial Public Offering) for O2 that was postponed due to Brexit uncertainties. The company’s recent move, as per Jefferies analysts, is targeted at minimizing its debt load that was recorded at £33.5 billion at the end of 2019.

Liberty Global, on the other hand, also wishes to dump its operations in Europe. The company sold its central European and German cable networks to Vodafone for £17.6 billion last year. In 2016, Liberty also created a joint venture with Vodafone for its Dutch operations.

Liberty Global increased its stake in ITV to 10% in 2015

Liberty also increased its stake in ITV to 10% in 2015. Owing to the COVID-19 driven production shutdown and advertising slump, the public service broadcaster has taken a massive financial hit in recent weeks as evident in the steep decline of its share price. The fate of the media company is now also tied to Virgin Media’s merger with O2.

If the transaction is completed, the joint venture will be a new competitor in the pay-TV sector for Comcast-owned Sky and in the broadband market for BT.

Telefonica is currently around 30% down year to date in the stock market while Liberty Global is trading around the same level at which it opened in January 2020. In terms of market cap, Telefonica is a much bigger company than Liberty Global.