Claims that creating a telecoms giant bigger than BT will be good for customers do not stack up
Announcements don’t come more perfectly timed than this. Bosses from O2 and Virgin Media have spent the last few days holed up in Denver, Colorado, putting the finishing touches to a £31bn blockbuster merger that will apparently “put customers first”.
Meanwhile, back in the real world, thousands of those very same customers were threatening to take to the streets with pitchforks after both networks were hit by outages. For anyone unfortunate enough to have Virgin Media broadband at home, including this long-suffering columnist, patchy connection and woeful customer service are a part of daily life.
O2’s record is better but that didn’t stop its voice network going down for several hours across much of the UK earlier this week. Still, who cares when the owners of both firms stand to walk away with bucket loads of money from this deal?
Forget all the spin about how Virgin Media has “redefined broadband and entertainment”, so too its fragile claims about “lightning fast speeds”, and O2’s boast that it is “the most admired mobile operator in the UK”.
This is a tie-up straight from the corporate finance laboratory – an impressive piece of financial engineering designed by investment bankers to ensure that owners Telefonica and Liberty Global take the maximum amount of cash off the table while laying out a pathway to a full exit further down the line.
Telefónica will pocket £5.7bn in cash, as well as an “equalising payment” of £2.5bn from Liberty Global. Liberty, meanwhile, will receive a £1.4bn windfall after carving out Virgin Media’s Irish arm.
To fund this neat act of financial alchemy, the joint venture will be saddled with £6bn of new debt, taking total borrowings to £18bn, or a hefty five times earnings. Without a buyer for either business, the whole shooting match is being sold to the debt markets.
The two sides will be pinching themselves. Telefónica is drowning in debt and this is a third attempt at retreating with something to show for 15 years of ownership. A merger with Three was blocked by Brussels, and stock market float of O2 has been on and off more times than Virgin Media’s wretched broadband network.
Liberty’s investment in Virgin Media has been a desperately underwhelming affair but one befitting of a pseudo-private equity house. Dominated by cost-cutting, price hikes, and customer service outsourcing, the firm is ill-equipped to compete in a forthcoming new era of massive investment.
And the speed advantages of cable are about to be obliterated by BT’s network upgrade to full fibre, even more so now that BT has billions more to deploy after axing its dividend.
There’s nothing new to see in their pledge to invest £10bn in the network over the next five years. That’s just adding up what the two sides had already planned to spend, while about £1bn of that funding will come through a clever tax wheeze by funnelling O2’s profits through Virgin’s historic losses.
Claims that this tie-up will be good for customers don’t stack up either. Despite £540m of inevitable “synergies” –corporate speak for cost-cuts and other savings – a year, there is no guarantee of price cuts.
Although buying bundles is cheaper because of so-called convergence, the cost of such packages has actually gone up 10pc since 2014, according to Ofcom.
This is a budget tribute act to BT’s takeover of EE five years ago, waved through by supine competition authorities. Regulators surely won’t be so soft this time around.
Come fly with SHI
Surely there are better things to do on St Barts? How about a bite to eat at Le Select, the restaurant that supposedly inspired Jimmy Buffett’s smash hit Cheeseburger in Paradise? Or Maya’s To Go (bikinis allowed, according to Vogue) for a leisurely breakfast?
Not if you’re Sir Stelios Haji-Iaonnou, who has decamped to the Caribbean paradise to concentrate on an entire series of increasingly wild conspiracy theories it seems.
His latest offering is a peach fit for his new sunny surrounds: apparently a trio of shareholders that have publicly backed easyJet in its looming showdown with SHI, as he is now fondly referred to by the airline, aren’t what they seem.
The tycoon has somehow convinced himself that the three are Airbus “strawmen”, sent to stop his campaign to force easyJet to cancel a £4.5bn order of planes. Still, at least he has some strong evidence to back up this wild allegation against a group of major shareholders accounting for 14pc of the shares: “They sound like the Airbus chief marketing officer.”
Not only that, but two of them – “Phoenix something” and “Ninety something” are “newcomers out of nowhere”. That would be Phoenix Asset Management and Ninety One, the South African investment giant formerly known as Investec, that have been investors since 2016 and 2017 respectively.
The only thing that is made out of straw is his bizarre vendetta.