ii view: Liberty merging its UK Virgin unit with O2

Having sold swathes of its European operations, Liberty is busy again.

First-quarter results and merger

• Merging its UK Virgin business with Telefonica’s O2 business
• Operating income up 166% to $280.6 million 

Chief executive Mike Fries said:

"Along with the rest of the world, we’ve been focused in recent weeks on tackling the challenges associated with the Covid-19 pandemic. I am happy to report that our broadband networks have readily absorbed increases exceeding 20% in downstream and 50% in upstream bandwidth across our footprint. Our recent investments in infrastructure, gigabit speeds and connectivity products have proven invaluable to our customers.

ii round-up:

The UK divisions of European cable network operator Liberty Global (NASDAQ:LBTYA) and telecoms giant Telefonica (XMAD:TEF) are to merge, bringing Liberty’s Virgin Cable and Telefonica’s O2 businesses together. 

The deal news came alongside first-quarter results from Liberty. 

Liberty will pay Telefonica £2.5 billion to make equal their ownership in the new business.

The 50:50 joint venture is expected to generate cost savings in the region of £6.2 billion. 

Having last year sold its operations in Germany, the Czech Republic, Hungary, and Romania to Vodafone (LSE:VOD) for $21.3 billion, Liberty now operators in six European countries including the UK, Ireland, Belgium and Poland.  

Liberty CEO Mike Fries said: “We couldn’t be more excited about this combination. When the power of 5G meets 1 gig broadband, U.K. consumers and businesses will never look back.”

Product bundles combining fast broadband internet speeds with accompanying mobile phone offers helped Liberty quarterly profit climb to £280.6 million. 

The merger between Virgin and O2 will allow Virgin to utilise O2’s network instead of spending money to lease capacity from other operators. 

Liberty Global class A shares are down just over 7% in 2020 having gained by 6.5% in 2019. Shares for UK rival BT Group (LSE:BT.A), which has just announced the suspension of its dividend, have fallen by 50% over the last year.  

The deal, if approved by regulators, is expected to complete in the middle of 2021. 

ii view:

After Liberty sold European operations to Vodafone for $21 billion last year, the UK under its Virgin brand name became its biggest division, generating around half of group sales. Now, the UK business could elevate itself further, merging with Telefonica’s UK O2 division and creating an operator with over 46 million video, broadband and mobile subscribers. 

For investors, the hurdle of regulatory approval now needs to be gained. Rivals such as BT could look to lobby hard against the merger, but the potential combination of Virgin cable and O2’s mobile business in the UK is an exciting one. For now, and in the midst of Covid-19 work-from-home lockdowns, investors are likely to stay firmly put. 

Positives: 

• Merger creates a player with over 46 million subscribers
• Previously returned cash to shareholders

Negatives:

• Merger requires regulatory approval
• Reduced geographical diversification 

The average rating of stock market analysts:

Strong hold