O2 and Virgin Media will merge into a single British communications giant capable of offering converged services combining fixed and mobile connectivity.
As rumored earlier this week, parent companies Telefonica and Liberty Global agreed to combine O2's 4G and 5G infrastructure with Virgin Media's high-speed cable network into a joint venture worth more than £ 31 billion.
O2 currently has 34.5 million users on its network, a figure that includes mobile virtual network operators (MVNOs) such as Tesco Mobile, while Virgin Media has more than 5 million subscribers. The combined customer base immediately propels the merged entity to the largest telecommunications companies in Europe.
The potential for converged services is significant, with Telefonica and Liberty Global promising to invest £ 10 billion over the next five years, while consolidation will also lead to savings of £ 6.2 billion.
It is not clear whether one or both brands will be used by the combined entity, but it will be better placed to compete with BT, which has favored convergence in recent years with the acquisition of EE and investments in 5G and fiber infrastructure.
Although Virgin Media has a mobile virtual network operator (MVNO), it has never had a mobile network. Likewise, O2 does not have a fixed network. The convergence will allow the development of new consumer and business services that will take advantage of multiple communication technologies.
“We are creating a strong competitor with significant scale and financial strength to invest in the UK's digital infrastructure and provide millions of consumers, businesses and public sectors with more choice and value,” said Jose Maria Alvarez-Pallete, CEO of Telefonica. “This is a proud and exciting time for our organizations as we create a leading integrated communications provider in the UK.”
“With Virgin Media and O2 together, the future of convergence is here today,” added Mike Fries, CEO of Liberty Global. “We saw the benefit of [Fixed Mobile Convergence] first hand in Belgium and the Netherlands. When the power of 5G reaches 1 gig broadband, consumers and businesses in the UK will never look back. We are attached to this market and are lagging behind the government's digital and connectivity objectives. “
Telefonica almost sold O2 to Three's parent company, CK Hutchison, in 2015. A £ 10.25 billion deal to merge the two operators was reached, but the European Commission has blocked the decision due to problems of competition. The combination of O2 and Three would have created the UK's largest mobile operator and reduced the number of players from four to three. It was unpleasant for the EC who feared that innovation would decrease and that prices would increase.
O2 performed well for Telefonica in the years that followed, with Telefonica considering an IPO before the merger proposal was made. Virgin Media was first linked to an O2 takeover in the immediate aftermath of the collapsed merger attempt.
The deal is expected to close next year, subject to regulatory approval from competition authorities. Since O2 and Virgin Media have complementary networks, they hope that the transaction will be viewed favorably.