Britain is set to play host to the biggest corporate deal of the pandemic as the owners of O2 and Virgin Media prepare to lift the veil on a £24bn bid to transform the telecoms sector.
Telefonica, the Spanish owner of O2, confirmed it is in talks to combine the mobile operator with Virgin Media, the cable operator controlled by the Colorado-based “Cable Cowboy” John Malone, via his holding company Liberty Global.
Goldman Sachs analysts estimated the combined company, expected to be structured as an equal joint venture, would be worth as much as $30bn including debt. It will leapfrog BT to become Britain’s biggest operator, with 34pc of the market.
City sources said that Telefonica, which is saddled with heavy debts built up in ill-fated global expansion, is due to extract billions in cash from the merger by providing O2 debt-free. By contrast, Virgin Media is expected to be heavily burdened with borrowing.
A debt-fuelled recapitalisation of the cable network by Liberty will deliver a multibillion-pound payment to Telefonica to balance the transaction, estimated by Deutsche Bank analysts at up to £7.5bn.
The Spanish giant has been trying to cash in on O2 for several years and previously attempted to sell the operator to BT, Three and stock market investors through a planned float that was abandoned amid Brexit terms.
The final terms of the Virgin Media deal are expected to be unveiled to European investors on Thursday following Liberty’s first quarter results in New York on Wednesday night.
The timing sets up a clash with BT, which reports on Thursday. It is expected to cut its dividend by up to 50pc to fund an acceleration in the rollout of “full fibre” broadband. BT’s investment is viewed as one of the main driving forces behind Liberty’s plans, as it means Virgin Media will face a large-scale competitor with a more advanced network for the first time.
Merging Virgin Media and O2 is expected to generate savings of hundreds of millions a year. They include avoiding more than £100m annually in corporation tax on O2’s profits, which are expected to be funnelled through Virgin Media’s historic losses, built up during the chaotic cable rollout of the 1990s.
The management structure of the joint venture is not expected to be revealed this week, although it is understood that Liberty will choose the chairman, likely to be its own chief executive Mike Fries.
The leader of the combination is likely to be chosen from Mark Evans, the chief executive of O2, and Lutz Schuler, his opposite number at Virgin Media.
The merger will also raise questions over whether to continue using both brands or to unify under a single banner as mobile and fixed line services gradually converge in the shift to 5G. Telefonica owns the O2 brand, acquired when it bought the operator formerly known as BT Cellnet in 2005, taking it off the stock market.
Liberty has rented the Virgin brand from Sir Richard Branson for an annual fee of £10m since it acquired Virgin Media in 2013.
Liberty is being advised by Liontree, a specialist media and telecoms boutique that counts the former Conservative communications minister Ed Vaizey as an “executive in residence”. Liontree’s founder Aryeh Bourkoff is a confidante of Mr Fries and longstanding dealmaker to Mr Malone’s empire, which also includes Formula One and the broadcaster Discovery.
Liberty is also working with investment bankers from JPMorgan, while Telefonica is being advised by Citi.