Liberty Global and Telefonica have reached an agreement to merge their UK operations in a 50-50 joint venture. This brings together the country's largest mobile operator O2 UK with cable operator Virgin Media and its MVNO Virgin Mobile.
The deal values O2 at GBP 12.7 billion and Virgin Media at GBP 18.7 billion. In addition, Virgin Media will contribute net debt of GBP 11.3 billion to the venture. The merger will result in cash proceeds for the two shareholders of GBP 5.7 billion for Telefonica and GBP 1.4 billion for Liberty Global, after a cash equalization payment to Telefonica of GBP 2.5 billon.
The combination of Virgin Media and O2 will create a nationwide integrated communications provider with over 46 million video, broadband and mobile subscribers and GBP 11 billion of revenue. The merger sees the operators choosing fully for fixed-mobile convergence, with the aim of growing results by cross-selling services to each other's base. Additional growth is expected from expansion in the B2B market.
Synergies of GBP 6.2 billion
The companies expect total synergies of GBP 6.2 billion after integration costs of an estimated GBP 700 million. Annual cost, capex and revenue benefits are targeted to reach GBP 540 million on an annual basis within five years of closing. That includes annual revenue synergies of GBP 110 million. The remaining cost and capex savings are expected to come from savings on wholesale network agreements, migrating Virgin Mobile to the O2 network, consolidating IT systems, shops and offices, and reducing marketing and administration costs.
The joint venture's board will count eight members, four from each shareholder including the CEOs of Liberty Global and Telefonica. They will alternate the chairman's position every two years.
IPO option within 3 years
Each shareholder will have the option to initiate an initial public offering of the company after three years, with any further share sales restricted in the first five years. The 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.
Closing of the takeover is expected around mid-2021, pending regulatory approval. The companies said they have started already preparing the regulatory application and confirmed they would act independently in the upcoming spectrum auction in the UK. No shareholder approvals are required, but closing does depend on a planned recapitalisation worth GBP 6 billion. A syndicate of banks has underwritten a GBP 4 billion standalone financing for O2 as part of the deal.
Virgin Media's business in Ireland is excluded from the transaction.
