O2 and Virgin Media could merge as Telefonica confirms talks underway

Tom Belger
Finance and policy reporter
O2 owner Telefónica confirmed negotiations had begun with Liberty Global, owner of Virgin Media. (PA)

One of Britain’s biggest mobile networks O2 could merge with cable TV and broadband giant Virgin Media, after O2’s owner confirmed talks were underway.

Spanish phone giant Telefónica (TEF.MC), which took over O2 in 2006, confirmed negotiations had begun with Liberty Global, owner of Virgin Media. Its shares were trading 4.2% higher at around midday in London.

O2 is one of Britain’s largest mobile networks, and also supports operators Tesco Mobile, Giffgaff and Sky Mobile. Virgin Media provides cable TV, phone and broadband services, but also has mobile customers but uses other companies’ networks.

Speculation had been growing in recent days over a potential tie-up, with reports a merge could be confirmed as early as this week. The Financial Times and Sunday Telegraph both suggested the deal could be a 50:50 joint venture, with a payment to Telefónica.

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Telefónica, which operates in 14 countries including as O2 in Britain, Spain and Germany, released a statement on the talks on Monday.

It said: “In relation to the news published in some media regarding the discussions with Liberty Global on a potential integration of their respective telecommunications businesses in the United Kingdom, Telefónica informs that the process initiated by both parties is in a negotiation phase, not being able to guarantee, to this date, neither the precise terms nor the probability of its success.”

It added: “In the event of a satisfactory agreement on this potential transaction, Telefónica will communicate such information to the markets.”

Polo Tang, head of European telecoms equity research at UBS, said in a note to clients that the background was a “challenging” one in the UK. He highlighted new legislation requiring firms to notify customers when their broadband, phone, pay TV or mobile contract is about to expire, which could prompt them to shop for alternative deals.

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But he said there could be cost savings of between $4.5bn (£3.6bn) and $6.3bn (£5bn) from a merger, adding that it improved Telefónica’s “asset mix” in a major market. The resulting company could be a “stronger competitor” to telecoms giant BT (BT.AL), which owns phone network EE, he added.