On 7 May 2020, Telefonica and Liberty Global announced a deal to merge their United Kingdom operations. Combining two of the UK’s biggest telecommunication companies (telcos), O2 and Virgin Media, this joint venture will effectively create “the leading fixed-mobile provider in the country”, changing the face of this sector as we know it.
This deal comes at an interesting time for the telecommunications industry. During the COVID-19 pandemic, connectivity has become more vital than ever before and whilst other industries have suffered from the economic downturn, these services have proved relatively resilient. The pandemic has also stifled some corporate transactions whilst delaying others.
Although this deal has been in the pipeline for some time, the timing of this announcement demonstrates faith in the UK economy at a time when its future seems uncertain; the news followed a month during which the economy fell by a record 20 percent. Competition between leading telcos is fierce and has been amplified more recently by the race to deliver 5G networks. Although there has been some debate about the sale of spectrum for these networks and political and security concerns surrounding the use of Huawei’s technology continue to cause some disruption, companies such as EE and Vodafone remain determined to offer their customers the fastest speeds yet.
By combining the fastest broadband network, Virgin Media, and the largest mobile network, O2, this joint venture may establish a leading position in the race to implement 5G. As promised by the CEO of O2, the two companies “will bring together 5G technology with gigabit broadband creating exciting new integrated services” for the benefit of their customers. However, the deal remains subject to regulatory approvals which will be concerned with its implications for consumers and competitors.
The Competitions & Markets Authority (CMA), who will oversee this review, works on behalf of consumers and businesses to preserve healthy competition and thus support the wider economy. It will first assess “whether it believes that the merger results in a realistic prospect of a substantial lessening of competition”. If this is found to be true, further checks may be made in an in-depth “Phase 2” assessment, which may result in remedies or a block on the deal.
Under the advice of leading law firms, Allen & Overy (Liberty Global), Clifford Chance (Telefonica), and Herbert Smith Freehills (Telefonica), much emphasis has been placed in press releases and marketing on its benefits for individual customers and businesses. As the CEO of Telefonica stated, “We are creating a strong competitor with significant scale and financial strength to invest in UK digital infrastructure and give millions of consumers, business and public sector customers more choice and value”.
Nevertheless, earlier deals between leading telcos have been unsuccessful. The proposed sale of O2 to Three, for example, was blocked in 2016 following a detailed investigation by the European Commission, on the grounds that it “would likely have resulted in higher prices for mobile services in the UK and less choice for consumers”. Whilst many groups have made deals to share their networks, known as “piggybacking”, fully-fledged sales and acquisitions are subject to much greater scrutiny and are more likely to be deemed anti-competitive.
Hope remains for this deal, however, as it combines a mobile operator and a fixed operator which offer different services and have different strengths. Although these services complement one another, it is likely that they will not be regarded as anti-competitive in the same way as the prohibited Three-O2 deal. Instead, this deal mirrors the £12.5 billion takeover of EE by BT which was finally approved by the CMA in January 2016 because the two companies operated “in separate areas”. Indeed, the O2-Virgin Media deal may further benefit from ongoing concern to prevent BT-EE from monopolising the market. Similar to the BT-EE deal, Telefonica and Liberty Global can expect this transaction to be subject to lengthy and detailed investigation with final closure predicted for mid-2021.
Criticism can also be expected from competitors. Just as the BT-EE deal faced objections from “a host of players”, there will be apprehensions about this joint venture. Together, Virgin Media and O2 have a combined revenue of £11 billion and a value of £31.4 billion on a total enterprise value basis, which places them ahead of many of its largest competitors.
The BT Group, for example, reported a revenue of £23.4 billion in 2019, whilst the Vodafone Group recorded a revenue of €5.4 billion (approximately £4.9 billion) from its UK operations. The innovations which would result from such a deal would certainly lead to faster operating speeds for customers and could consolidate the sector.
However, it may also pose some challenges for competitors who would be forced to review and update their services to compete. As BT announces the cancellation of its dividend for the first time in 36 years and rumours swirl that it is looking to sell its stake in Openreach, the merger of two of its competitors may be a further blow. The venture will also certainly have some implications for smaller companies. Even if this deal is not termed “anti-competitive” by regulators, it will certainly redefine the telecommunications industry.