UK Gives Provisional Green Light to Merger of O2 and Virgin, Key for Pallete | Companies

Relief for Telefónica in the UK. The British competition authority, the CMA, has given a provisional green light to the merger of O2, the British subsidiary of the Spanish company, with Virgin Media, owned by the American LIberty Global. The operation is valued at 35,800 million and will create a telecommunications giant in the country, which with 46 million lines, between mobile, fixed broadband and television, seeks to threaten the historical leadership of BT. For this reason, the authorization of competition is key.

“A thorough analysis of the evidence gathered during our investigation has shown that the agreement is unlikely to lead to an increase in prices or a reduction in the quality of mobile services, which means that customers should continue to benefit from strong competition.” , has indicated the CMA. The competition authority, in this case the European Commission, has already thwarted a key operation of Telefónica O2, its sale to Hutchison in the spring of 2016.

Like the former, the integration of O2 and Virgin is key to the plans of the Spanish company and its president, José María Álvarez Pallete, in reducing debt. With the operation, teleco foresees a debt reduction of between 6,300 and 6,652 million euros, and an initial payment of 6,500 million euros. At the end of 2020, Telefónica’s debt was around 35,000 million, although the teleco pointed out that, with the pending operations, the merger of O2 and Virgin, and the sales of Movistar Costa Rica and the Telxius towers to American Tower, indebtedness would be around 26,000 million.

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The operation was announced in May last year, in the midst of the pandemic, and a few months later the United Kingdom asked Brussels for the operation’s file, in view of its characteristics and the end of the post-Brexit transition process.

The CMA has indicated that its analysis has not focused on possible duplications in the retail markets, without considering whether the operation may reduce competition in the wholesale market, that is, in the rental of services to third-party operators.

Virgin rents lines to operators such as Vodafone or Three to complete its own networks, while O2 rents its network to alternative mobile operators. The CMA feared a price hike in these areas, but has provisionally ruled out this possibility, indicating that customers should continue to benefit from strong competition.

The final approval could take place during the month of May, according to industry sources, who point out that it is highly unlikely that the CMA could change the direction of its decisions. From the outset, Telefónica’s management has demanded approval without conditions, recalling that, in 2015, the United Kingdom gave the green light to a very similar transaction, the purchase of Everything Everywhere by BT, also without setting conditions.

Both partners have worked with that conviction. In fact, already in the second half of 2020, they completed the recapitalization of the joint venture, with the raising of more than 6,100 million euros between credits and bonds. Last week, Telefónica and Liberty announced the management structure of O2 Virgin Media. Thus, Lutz Schüler, from Virgin will be the CEO of the new operator, while Patricia Cobián, financial director of O2, will occupy the same position in the joint venture.

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In addition, Liberty Global has accelerated in recent weeks the segregation of Virgin Media’s business in Ireland, which was not part of the agreement with Telefónica.

Telefónica and Liberty have argued that the merger combines the mobile strength of O2, with an ambitious 5G deployment, and the weight of Virgin Media in fixed broadband. One of the promises of both partners is the acceleration of the deployments of the next generation infrastructures, both mobile 5G and fiber. In this case, the Spanish group has highlighted that it will contribute its experience in the deployment in markets such as Spain and Brazil.

Telefónica shares started the session with slight decreases, amid the doubts that surround the markets. In the first minutes of trading, they are left around 0.7%, up to 3.71 euros. Various analysts have agreed that the approval of the merger of O2 and Virgin Media should be a catalyst for the recovery of the matildes.

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