Liberty Global and Telefonica’s €35.2 Billion Merger

By Marcus Falck, Elsa Henriksson (Stockholm School of Economics), Steven Skomra, Zach Trotzky, Dylan Barnacle (Georgetown University) | 18/05/2020


Overview of the deal

Acquirer: Liberty Global

Target: Telefonica

Estimated value: €35.2bn

Announcement date: May 7 2020

Acquirer Advisors: JPMorgan Chase

Target Advisors: Citigroup


Telefonica S.A. and Liberty Global Plc will form a 50:50 joint venture where Telefonica will contribute its UK based subsidiary O2 which is valued at €14.2bn and Liberty Global will transfer its UK-based subsidiary company Virgin Media which is valued at €21bn. First of all, the JV will create a stronger fixed and mobile competitor in the U.K. market and will enable Virgin Media to expand its giga-ready network and O2’s 5G mobile deployment. Secondly, the combination of Virgin Media’s market-leading v6 video service and giga-ready broadband network with O2’s 5G ready mobile propositions will benefit their UK customers with superior connectivity and entertainment both inside and outside the home. Lastly, the JV will further create a nationwide integrated communications provider with over 46m video, broadband and mobile subscribers, and €12.3 bn of revenue and is expected to generate significant operating benefits, with estimated run-rate cost, CapEx and revenue synergies of €605m on an annual basis.


“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”
- (Telefonica CEO, Jose Maria Alvarez-Pallete)

Company Details (Acquirer - Liberty Global)

Liberty Global, the US-listed, UK-based company headquartered in London, is one of the world’s leading converged video, broadband and communication companies, with operations in six European countries under the consumer brands Virgin Media, Telenet and UPC.


Founded in 2005

CEO: Mike Fries

Number of employees: 20,600

Market Cap: $12.989bn

EV: $29.823.32bn

LTM Revenue: $11.542bn

LTM EBITDA: $4.641bn

LTM EV/Revenue: 2.58x

LTM EV/EBITDA: 6.43x


Company Details (Target - Telefonica)

Telefónica, the listed Spain-based company headquartered in Madrid, is one of the largest telecommunications operators in the world. The company offers fixed and mobile connectivity as well as a wide range of digital services for residential and business customers, specializing in mobile and fixed-line telephone services. Telefónica operates in Europe and Latin America.


Founded in 1924

CEO: Jose Maria Alvarez-Pallete

Number of employees: 113 800

Market Cap: €21.455.62 bn

EV: €73.391.78 bn

LTM Revenue: €47.810 bn

LTM EBITDA: €16.006 bn

LTM EV/Revenue: 1.54x

LTM EV/EBITDA: 4.59x


Projections and Assumptions

Short-term consequences

The board of directors of the JV will be formed prior to the completion, which will consist of 8 members, four from each of Liberty Global and Telefonica. Mr. Fries, CEO of Liberty Global, and Mr. Alvarez-Pallette, CEO of Telefonica, will sit on the board and the post of Chairman will be held for alternating two-year periods by Liberty Global or Telefonica with Liberty Global holding the position first. After the third anniversary of the completion, each shareholder of the JV has the right to initiate an initial public offering and after the fifth anniversary of the completion, each shareholder will be able to initiate a sale of the entire JV to a third party, subject to a right of first offer in favor of the other shareholder.


The combination of Virgin Media’s v6 video service and broadband network with O2’s 5G capabilities will create a high-quality market offering with products that will feature high connectivity through and a superior entertainment system at a time in the U.K. when the demand for connectivity has never been greater. Under the terms of the deal, Telefónica will receive a €5.7 bn cash payment, which will likely be used to pay down on the company’s current debt load, which was valued at €37 bn in 2019. Additionally, Liberty Global will be paying €2.5 bn to equalize the JV, a reflection of Virgin Media’s €11.3 bn debt balance. Telefónica shares rose as much as 4.4% on the announcement of the merger but fell back down to 1.12% on the late-afternoon European trading. Investors remain optimistic that the integration of O2’s mobile network with Virgin’s fixed broadband network would be complementary to each other, leading to recent gains in an otherwise volatile market environment. In the wake of the COVID-19 pandemic and the skyrocketing use of internet services with customers working from home, this deal of telecom companies could lead to products and packages that have a large appeal within the next year.

Long Term Upsides

Telefonica expects a total of €7bn in synergies within 5 years of the deal’s closing, with 80% related to operating and capital expenditures, and the remaining 20% related to revenue. The key expected sources of cost and CapEx synergies includes: Use of existing infrastructure to provide services for each entity’s customers at a lower cost compared to standalone/wholesale capabilities, Migration of Virgin Media mobile traffic to Telefonica UK’s network, Combination of regional and national network infrastructures and IT systems, Reduction in combined marketing expenditures, Potential to reduce general and administration costs; and Site rationalization.


The deal may also place increased pressure on other industry competitors creating the possibility for further deal-making. The new company’s pooled subscriber base of 46m will make it the largest in terms of size, but second in annual revenues behind BT Group. Rivals Vodafone, Sky, Three UK, and TalkTalk will all face diluted market shares as a result of the combined services of Virgin Media and O2. Current market leader BT Group will also face pressure if O2 is able to successfully access Virgin Media’s national networks, as it currently pays BT for access to its national network. BT is currently the only UK provider to offer both a mobile and a fixed broadband network. Combining both O2 and Virgin’s distinctive capabilities will allow the two companies to compete directly with BT, putting rivals such as Vodafone at a disadvantage. These combined effects could open the potential for future consolidation in an industry that has remained relatively deconsolidated thus far.


Risks and Uncertainties

After British and European regulators united to block Telefonica Chairman Jose Maria Alvarez-Pallete’s attempt to sell O2 to CK Hutchison Holdings Ltd in 2016, such a deal may seem threatened by similar efforts. These actions set a precedent against telecom industry consolidation throughout Europe as regulators feared that combining networks could lead to an increase in average prices for consumers. On the other hand, as the COVID-19 pandemic creates an increasing dependence on telecommunications, regulators may be more lenient as mergers will allow for greater investment into networks. Additionally, given that O2 and Virgin Media operate in different industries, many analysts view the risk of regulatory intervention being significantly lower than in past deals.


The intentions of the deal, however, have received some skepticism. Competitors such as Vodafone will be facing a big disadvantage if this deal were to take place. Furthermore, Liberty and Vodafone have a history of almost striking a deal in the past. This had led some analysts to believe that talks between Liberty and Telefonica may be a strategic maneuver by CEO Mike Fries to improve the terms of a Vodafone deal that he may secretly still be chasing. The potential for a rival bid from Vodafone or another industry competitor is still unknown.


“We think this deal will trigger a ripple effect on the UK market. Vodafone, Three, Sky and TalkTalk will all be assessing their positions and further deal-making can’t be ruled out.”
-(CCS Insight Analyst, Kester Mann)

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