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Liberty and Telefonica in $38 billion UK tie-up to take on BT

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Liberty Global and Telefonica) have agreed to merge their British businesses in a $38 billion deal, including debt, that will create a powerhouse in mobile and broadband to take on market leader BT

In the biggest shake-up of the British telecoms market for five years, the deal will bring together the biggest cable TV provider in Liberty’s Virgin Media with Telefonica’s O2, the second-largest mobile operator.

The tie-up mirrors a succession of deals struck by Liberty’s billionaire founder John Malone in Europe that have created one-stop shops for consumers in mobile and broadband, and will allow Spain’s debt-laden Telefonica to extract cash, while remaining in Britain after it tried and failed to sell O2 in 2016.

It will also force rivals Vodafone, Comcast’s Sky, Three UK) and TalkTalk to examine whether they need to have the full set of fixed and mobile assets to keep up with the two major market players.

“It’s not a secret any more, when 5G meets 1 gig broadband we know magic can happen for customers,” Liberty Global CEO Mike Fries told reporters on a conference call, referring to super-fast internet speeds in both mobile and broadband.

Telefonica CEO Jose Maria Alvarez-Pallete said the two businesses would be “much stronger together”.

Under the terms of the deal, one of the biggest since the coronavirus pandemic upended the world economy, the parent companies will have equal ownership of the combined entity. They expect to achieve 6.2 billion pounds ($7.7 billion) of synergies on an annual basis by the fifth full year after closing.

The deal values O2 at 12.7 billion pounds and Virgin Media at 18.7 billion pounds, including debt. The newly formed entity will invest 10 billion pounds in the UK market over five years.

That will help it keep up with BT, Britain’s one-time monopoly which on Thursday announced it was spending 12 billion pounds to upgrade its legacy copper network to faster full fibre connections, targeting 20 million premises by the mid to late 2020s.

The new group will also hope to capture a bigger share of the business sector, competing with BT and Vodafone at a time when the virus pandemic is forcing companies to cut spending.

It could further hurt Vodafone, the world’s second-biggest mobile operator which has struggled in its home UK market, because it had signed a deal to provide mobile services to Virgin from next year.

Shares in BT, which announced separately it was suspending its dividend until 2021/22, fell as much as 12% to an 11-year low of 101.1 pence.

Vodafone shares were down 1% to 111.4 pence at 0930 GMT, while Telefonica’s were little changed at 4.25 euros.

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“Personally, I think the industry needs consolidation so it’s a sensible move. It follows our strategy,” BT CEO Philip Jansen told reporters, noting how Britain’s largest fixed-line provider bought its biggest mobile network EE in a deal that closed in early 2016.

Liberty’s Fries said the merger talks with Telefonica started before the coronavirus outbreak swept the world.

CCS Insight analyst Kester Mann said it would make sense to keep the O2 brand, if they only keep one to cut costs, because it had built stronger customer loyalty.

Virgin Media was formed from a combination of Britain’s cable assets and Virgin Mobile, the pioneering virtual mobile network, in 2007, and bought by Malone in 2013. It licenses Richard Branson’s Virgin brand.

The 79-year-old Malone has built his empire over more than 40 years of dealmaking in the cable and pay-TV industry, funded largely through debt.

Liberty is one of Europe’s largest TV and broadband companies, with operations in six countries under the consumer brands of Virgin Media, Telenet and UPC. Malone sold his networks in Germany and central Europe to Vodafone last year as part of the same wave of combining fixed lines with mobile.

Analysts expect this deal, which involves predominantly mobile and fixed-line operators rather than two mobile firms, to be approved by regulators, as occurred with BT’s purchase of EE.

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