Liberty Global, Telefonica Merge Virgin Media, O2 in U.K.

MADRID —  Fulfilling predictions, John Malone’s cable company Liberty Global and Spain-based Telefonica have created a 50-50 joint venture, merging Liberty Global’s broadband network Virgin Media and Telefonica’s mobile platform O2, Telefonica and Liberty Global announced Thursday.

The merger creates the leading fixed-mobile provider in one of the biggest telecoms market in Europe, with O2 valued at £12.7 billion ($15.7 billion) and Virgin Media valued at £18.7 ($23.2 billion), both on a total enterprise value basis, the partners estimated. The merged entity will have 34% of the U.K. telecoms market, by revenue, edging out current market leader BT, which has a 32% market share. 

O2 will be transferred into the joint venture on a debt-free basis, while Virgin Media to be contributed with £11.3 billion ($14.0 billion) of net debt and debt-like items.

The joint venture will have the “scale to innovate in the changing digital landscape, investing £10 billion in the U.K. over the next five years,” the partners said.

“Combining O2’s number one mobile business with Virgin Media’s super-fast broadband network and entertainment services will be a game-changer in the U.K., at a time when demand for connectivity has never been greater or more critical,” Telefonica CEO Jose Maria Alvarez-Pallete said in a statement.

He added: “We are creating a strong competitor with significant scale and financial strength to invest in U.K. digital infrastructure and give millions of consumer, business and public sector customers more choice and value. This is a proud and exciting moment for our organizations, as we create a leading integrated communications provider in the U.K.”

“We couldn’t be more excited about this combination. Virgin Media has redefined broadband and entertainment in the U.K. with lightning fast speeds and the most innovative video platform. And O2 is widely recognized as the most reliable and admired mobile operator in the U.K., always putting the customer first,” added Mike Fries,  CEO of Liberty Global. 

Beyond scale, the key to the deal –  which is sure to be a major talking point as Telefonica walks analysts through first quarter results on a conference call this morning in Madrid – is the sale of potential synergies which the deal brings to the two companies.

The partners said in a statement Thursday that the joint venture is expected to deliver “substantial synergies” valued at £6.2 billion ($7.7 billion) on a net present value basis after integration costs, and equivalent to cost, capital expenditure and revenue benefits of £540 million ($669.6 million) on an annual basis by the fifth full year post-closing. 

That is broadly in line with a Deutsche Bank estimate that the companies would be able to make savings of a total £6 billion ($7.45 billion) by combining back-office operations and infrastructure.

An Enders Analysis note on Monday took a slightly more cautious approach: “Merging the brands would save marketing spend, but risks losing subscribers given the great existing brand strengths in their respective markets.”

The note continued: Having the security of mobile network ownership (as opposed to hit-or-miss MVNO renegotiations every 3-5 years) does make a lot of sense. Cost synergies are real, albeit a bit tangential. However, in a mature market even modest synergies are worth pursuing.”