Liberty Global’s Virgin Media merging with mobile operator O2 in the UK would be an infinitely better outcome than Vodafone getting its hands on Virgin Media and one that is much more likely to appease regulators – but that should not deter Vodafone from lining up a counteroffer for Virgin Media.
Even if the more favorable deal on paper between Virgin Media and Telefonica-owned O2 goes ahead, we feel the UK could still be in danger of experiencing an equivalent to the formation of VodafoneZiggo in the Netherlands, a disruptive deal that somehow slipped past antitrust regulators with major long-term implications. The warning signs are all there – combining a cable TV and fixed broadband powerhouse with a strong mobile presence; complementary businesses that, in theory, should not thwart competition in the UK market but encourage it. But that’s what they always say.
Even if Vodafone is laughed out of the regulatory boardroom, any counteroffer could serve to prevent the current deal. If Liberty Global shareholders are tempted by Vodafone’s alternative offer (just as they were recently in Germany and Eastern Europe) and therefore killed the O2 deal, only for the merger to be blocked, then any chance of reviving a deal with O2 would be improbable at best.
The argument for the deal in O2’s favor will say that O2 cannot survive on its own without a fixed network business, while Virgin Media needs the O2 mobile network to cut ties with EE through which it delivers the Virgin Media MVNO business, to better compete with EE-owner BT in mobile. Let us remember that Telefonica attempted to sell off O2 to Three’s parent company, CK Hutchison, back in 2015, but the European Commission blocked the deal on obvious anticompetition grounds, as O2-Three would have owned 41% of the mobile market at the time. O2 has since gone on to thrive on its own, gaining some 5 million net mobile subscribers over this time.
The resulting merged operation would be a triple and quad play operation better equipped to compete with BT, creating a price war that should drive down consumer costs at a time when they are much needed. However, if history has taught us anything, it is that the opposite will happen.
Virgin Media has amassed a highly toxic reputation in the UK for implementing unwarranted price hikes without any warning. Parent company Liberty Global meanwhile is a connoisseur of getting business done – buying, selling and merging businesses with maximum efficiency.
Virgin Media and O2 say merged operations will deliver proposed synergies of £6.2 billion ($7.7 billion) and an investment of £10 billion ($12.4 billion) into the UK market over the next five years.
News of the proposed merger arrived in tandem with Liberty Global’s latest results. Virgin Media’s TV struggles continued with 65,600 video subscriber cancellations in the first quarter, shrinking further to a base of 3.62 million. Internet customers continued to climb though, gaining 8,200 in the quarter to reach nearly 5.3 million, while the mobile business grew by 40,900 subscribers to surpass 3.2 million.
O2, meanwhile, has no TV presence whatsoever and a minimal broadband footprint of just 29,000 customers, but has a substantial mobile subscriber base of 26 million. On top of O2’s own mobile user base, there are approximately 6 million more users of the O2 mobile network infrastructure, via MVNO deals including Tesco Mobile.
Should Vodafone look to derail the deal and pursue a merger with Virgin Media itself, we feel this is much less likely to satisfy regulators. Vodafone has about 2.9 million fixed broadband subscribers in the UK and some 18 million mobile customers, so Vodafone-Virgin Media would clearly be too powerful in fixed broadband, pay TV and mobile.
Virgin Media has been actively driving its own fixed-mobile convergence strategy through its MVNO service running on the EE mobile network, which is part of BT, and this deal would presumably be dead in the water should Virgin Media and O2 complete a merger. But what makes this situation even more interesting is that back in September 2019, Liberty Global teamed up with rival Sky to launch a new subsidiary called Liberty Fibre. This established a fiber network collaboration which could see Sky swap its current wholesale partner Openreach for Virgin Media.
In short, Sky and Liberty – two fierce video rivals – are buddying up to take on BT in a move which is sure to ruffle some regulatory feathers. Liberty Fibre wants to roll out full fiber network infrastructure in rural areas, in a project which requires some serious financial backing, so having Sky on board as an investor as well as a wholesale customer would be a brilliant bit of business by Liberty.
Faultline has been a vocal critic of Liberty Global’s stagnating strategy around video, highlighting that before long it will be virtually a pure broadband business selling high-end cable video packages to a select few.
Even enhanced video subscribers are now dropping off and after shuttering the SVoD service MyPrime, Liberty Global ultimately has no plan B in video. Through O2’s mobile network, Virgin Media has a way to expand. Should the merger be greenlighted by regulators, our hope would be that Virgin Media and O2 collaborate on a 5G-first mobile video steaming service.