Liberty Global and Telefónica are to create a 50/50 joint venture in the UK that will bring together Virgin Media and O2.
The fully converged platform resulting from the deal will invest £10 billion in the country over the next five years and deliver synergies of £6.2 billion. O2 is currently valued at £12.7 billion and Virgin Media at £18.7 billion, both on a total enterprise value basis. Under the terms of the agreement between Liberty Global and Telefónica, O2 will be transferred into the joint venture on a debt-free basis, while Virgin Media will be contributed with £11.3 billion of net debt and debt-like items.
Both parties expect to receive net cash proceeds at closing following a series of recapitalisations that will generate £5.7 billion in proceeds for Telefonica and £1.4 billion for Liberty Global (after an equalisation payment to Telefónica of £2.5 billion).
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 Telefónica and Liberty Global.
The transaction is expected to close around the middle of 2021 and is subject to regulatory approvals, consummation of the recapitalisations and other customary closing conditions.
Commenting on the merger, Telefónica’s CEO Jose Maria Alvarez-Pallete, said: “Combining O2’s number one mobile business with Virgin Media’s superfast broadband network and entertainment services will be a game-changer in the UK, at a time when demand for connectivity has never been greater or more critical. We are creating a strong competitor with significant scale and financial strength to invest in UK 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 organisations, as we create a leading integrated communications provider in UK”.
Mike Fries, CEO of Liberty Global, added: “We couldn’t be more excited about this combination. Virgin Media has redefined broadband and entertainment in the UK 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 UK., always putting the customer first. With Virgin Media and O2 together, the future of convergence is here today. We’ve seen the benefit of FMC first-hand in Belgium and the Netherlands. When the power of 5G meets 1 gig broadband, UK consumers and businesses will never look back. We’re committed to this market and are right behind the Government’s digital and connectivity goals”.
