O2 and Virgin Media team up to take on BT

The deal was announced Thursday by Telefonica (TEF), the Spanish telecom giant that runs O2, and Liberty Global, the US broadband provider that owns Virgin Media.

The companies are looking to form a stronger “mobile competitor” with the new UK joint venture, which will be split evenly between them. Combined revenue will be about £11 billion ($13.6 billion), while the deal values O2 at £12.7 billion ($15.7 billion) and Virgin Media at £18.7 billion ($23.1 billion).

Virgin Media, part of American billionaire John Malone’s media empire, has 3.3 million mobile subscribers in the United Kingdom, plus 6 million cable service customers.

The deal “creates a new telecoms powerhouse to compete with BT,” Jasper Lawler, head of research at London Capital Group, said in a note to clients Thursday.

BT shareholders suffered another blow Thursday, when the company announced that it was halting its dividend payments through 2021 and would not provide an outlook due to the “uncertainty created by Covid-19.”

The company’s shares slumped more than 9% in London, while Telefonica shares rose slightly in Madrid.

By teaming up, Virgin Media and O2 will be able to cut costs, with annual “synergies” expected to hit £540 million ($667 million) five years after the deal closes, they said. Virgin Media’s business in Ireland is not included in the deal.

The merger is expected to close in the middle of next year after gaining clearance from regulators.

The partnership is intended to be “a game changer in the UK, at a time when demand for connectivity has never been greater or more critical,” Telefonica CEO Jose Maria Alvarez-Pallete said in a statement. “We are creating a strong competitor with significant scale and financial strength to invest in UK digital infrastructure.”

That investment will include £10 billion ($12.3 billion) over the next five years, the companies added.

The merger is good news for broadband users in the UK, according to analysts.

“Heightened competition would foster investment in a country in need of better and broader fixed broadband access, while possibly curbing BT’s dominant position, too,” Dexter Thillien and Michela Landoni of Fitch Solutions wrote in a report.

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