O2 and Virgin media sign a £31.4 billion merger agreement to form a telecom giant in the UK

Earlier this week on Thursday, Spain’s Telefonica (EBR: TFA) and UK’s Liberty Global (NASDAQ: LBTYA) announced to have signed a £31.4 billion agreement to merge Virgin Media and O2 and introduce a new giant in the United Kingdom’s telecommunications industry.

The two firms agreed to a 50-50 partnership. As per the companies, the transaction is likely to be completed by mid-2021.

Virgin Media and O2 merger is expected to pose a serious competition to the UK’s BT. In a bid to combine wireless and fixed broadband networks, BT itself has completed multiple acquisitions in recent years including Vodafone, Sky, and the largest mobile network operator in the UK, EE.

According to CEO Jose Maria of Telefonica:

“The merger will be a game-changer in the UK, at a time when demand for connectivity has never been greater or more critical.”

As Coronavirus restricted people to their homes in the United Kingdom, demand for internet services has skyrocketed in recent months.

The combined group will have 46 million total subscribers

Following the merger, the new company will boast 46 million total subscribers across video, mobile, and broadband services, and revenue of £11 billion. The combined group will also benefit from O2’s experience in 5G mobile networks that are being anticipated as a prominent source of sales for telecoms companies in the upcoming years.

As per the companies, Virgin Media will bring a net debt of £11.3 billion to the joint venture while O2 will enter debt-free. In the next 5 years, the joint venture plans on making a £10 billion investment in the United Kingdom.

Analyst Paolo Pescatore comments on the merger

Analyst Paolo Pescatore of PP Foresight commented on the news and stated:

“This is an intriguing move. For sure, it is more likely to appease regulators than two mobile operators coming together. Let’s not forget the parents of both companies have been keen to offload these assets for a while. Therefore, there is more to this than simply convergence and competing with BT and Sky. Neither company is immune to the driving need for a converged network and services. This is the next battleground in the UK.”

At £17.52 per share, Liberty Global closed last week on Friday around 5% down year to date in the stock market while Telefonica closed roughly 35% down on Friday. At the time of writing, Liberty Global is valued at £10.58 billion and Telefonica has a market cap of £19.14 billion.