O2 and Virgin Media merger

Following a fairly public courtship, with on again-off again speculation proceeding over a while followed by firmer rumours of an impending announcement on Friday last week, O2 and Virgin Media have this morning announced plans to merge their assets (and, of course, their liabilities). The deal mirrors the combination of the merger of mobile and fixed line assets that BT and EE entered into some years ago and regulators are similarly unlikely to stand in the way of Virgin Media and O2. Indeed, they might even welcome a larger-scale competitor to BT.

The deal – intended to be complete by the middle of next year, regulators permitting – has an extremely complicated structure as regards the financial engineering and I’m not intending to go into that here. There are, however, a number of points to note as regards the policy implications of the proposed deal.

Firstly, there is the question of the ‘substantial synergies’ expected to arise from the arrangement – expected to total some £6.2bn net, according to the details set out in the announcement itself. Substantially, this will be in terms of the companies’ cost and capital expenditure commitments, with major implications specifically identified in the announcement in terms of the combining of network infrastructure and IT systems, marketing, general and administration costs and site rationalisations. As we might well anticipate, none of this is likely to mean good news for workers in the industry for jobs or future terms and conditions of employment. If you’re working in the industry – for any employer, not just those that have made the announcement today – and you’re not a member of the union; well, you know what to do: join here if you’re a manager or professional in any capacity; or here if you’re up the poles and down the holes, or in the offices or call centres.

Secondly, it extends the ‘convergence’ of the communications industry (i.e. the coming together of mobile and fixed-line telecoms). Long an industry buzzword, this was facilitated some years ago by the arrival of the smartphone – the computer in your pocket – and companies on either side of what was previously a divide have been a little slow to respond, for reasons that are clearly numerous. But deals of this scale are, pandemic apart, likely both to encourage each other and to lead to bigger ones. So far, convergence has affected companies within a single country, but the bigger deals of the future are likely to be international as death-bed capitalism struggles for one more throe [of the dice] although, post-Brexit, they are, perhaps, less likely to feature companies in the UK. Nevertheless, and especially in anticipation of the likelihood of regulatory approval, it firmly marks out the UK communications market as, finally and ultimately, a converged one as regards the supply of services to consumers, which will have several repercussions.

Thirdly, there are inevitable implications for BT as a result of the merger. What these might be are, as yet, unknown; and much depends on how serious a competitor the merged Virgin/O2 turns out to be in practice. Either way, BT has already been re-organising itself to deal with competition over an extended period, with a sharp impact on workers’ terms and conditions. Such activity might well not be stepped back in the future – and that would really come as no surprise at all.

Fourthly, there is a quite a bit which is going to have to be unknitted before the merger can be allowed to proceed. It is here that Ofcom – the UK regulatory body for communications – is likely to take the closest interest. Mobile operators have, over years, offered their networks to suppliers of mobile contracts who don’t have networks of their own, and have developed a web of extensive relationships with them. Some of these are identified by ISP Review in its comment on the merger announcement and include: Virgin Media’s five-year deal with Vodafone to supply mobile communications, commencing at the end of next year; and Virgin Media’s fibre capacity deal with Three, announced only two days ago. O2 of course also has a range of similar deals, supplying connectivity for the mobile offerings of both Tesco and Sky. Regulators are likely to insist that such offerings continue in principle, as it provides some – perhaps rather superficial – element of competition, but particularly once Virgin has ‘in-house’ capacity of its own, there will be costs in extricating itself from such contracts.

Some unknitting might also have to occur were the combined company to choose a new name for itself. Virgin Media – taken over by the US giant Liberty Media a while ago – currently pays Richard Branson a royalty of 0.25% of part of its consumer, business and content revenues, plus a further royalty on business operations revenues, with both together amounting to a minimum payment currently of £10.5m/year, for the privilege of using the Virgin name. The activities of the Virgin Group in terms of impact on customers’ goodwill is specifically named as a risk factor in the annual accounts. It never rains but it pours eh, Richard?

Fifthly, the deal poses interesting conundrums for the shrinking number of those companies that are left behind – chiefly, Sky, Vodafone and Three. Vodafone has long been linked with Virgin Media, and it may be that it seeks to enter the fray here although it was interesting to hear Karen Egan, telecoms analyst with Enders Research, comment on this morning’s Today programme on Radio 4 that she thinks both Vodafone and Sky are currently ‘off the table’ as a result of debt concerns of their own. Three has no fixed network of its own; Vodafone does, as a result of its takeover of Cable & Wireless some years ago, although its current wholesale associations with both Openreach and CityFibre are suggestive of some limitations in that respect; Sky’s fibre offering is via Openreach and it has no mobile network of its own, existing purely on the back of the networks of others. Within the converged market that the UK increasingly represents, there is little regulatory possibility, as currently conceived, for any of these to seek separately to merge with either BT/EE or Virgin/O2; and, while it is not the purpose of this blog to encourage such destabilising speculation, a more formal link between the three thus looks more likely as a result of this morning’s announcement. Regardless, if Egan is right, then even a merged operation would start not only as the number three operator but with a severe financial handicap. The comms lines between all three, and with their major investors, are indeed likely to be buzzing this lunchtime.

Sixthly, and most importantly of all – join the union. Now.

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