Two Telecoms Titans – The O2 & Virgin Media Merger
Earlier this month, the United Kingdom’s Competition & Markets Authority (CMA) provisionally cleared a £31 billion merger for the combination of O2 and Virgin Media. The owners of the two companies, Liberty Global (Virgin Media) and Telefonica (O2), came to an agreement last year, in May 2020, which entailed the two companies joining together in a 50-50 split venture. The merger is set to drastically change the telecoms landscape due to the combined resources of the two companies providing a rival for BT who hold the largest share of the market, at 38%, according to a UK Parliament Sector Report.
The merger is set to amass the number of customers serviced by the two companies to a total of almost 40 million people. This places the companies in contention with BT, who maintain just over 30 million customers, therefore posing a serious threat to their share of the market. Besides, the combined valuation of Virgin Media & O2 positions them with a £31.4 billion market value. In comparison, BT, which is also publicly traded (Ticker: BT.A), currently has a market cap of £15.3 billion (according to Yahoo Finance), displaying how this merger is a cause for concern for BT executives as they may now have a rival worth twice their value to contend with. After raising concerns that there could be negative downsides that appear due
to the combination, the CMA conducted a thorough investigation to ensure the deal was fair. The primary issue in dispute was that the merger would badly affect UK customers, with the possibility of price hikes or reduction in service quality following the completion of the merger. After concluding its analysis, the CMA confirmed that the merger would not negatively impact the telecoms market, due to a varied amount of competition being available from BT and other rivals, such as EE, Sky, Vodafone etc.
During the course of the investigation, Vodafone and Sky submitted objections to the merging of the two entities, based on different market factors. Sky contends that the merger would lead to a degradation in Sky’s market presence, due to the weight of the two combined companies giving them less incentive to resolve any commercial issues that may come into play with Sky following the merger. Another point that they argue is the possibility that the new entity will have the ability to engage in Input Foreclosure, a process where the new company has the ability to restrict rivals’ access to products or services that it would have otherwise been unable to beforehand, therefore raising competitors’ costs and placing pressure on those companies. Vodafone, on the other hand, it raised the issue that the converged mass of this new company would cause large-scale issues for the telecoms market. They stated in their submission that ‘the UK market will be dominated by two operators that serve more than double the number of fixed and mobile customers
compared to their nearest competitor’, clearly displaying concern about the reduction in market availability due to the transaction. It is likely that these proclamations will fall on deaf ears as the acceptance of these claims by the CMA would invalidate their approval of the BT & EE acquisition announced in 2016.
It is easy to observe that this transaction is sure to shake up the telecoms market for many years to come, if and when the merger is finally completed. Interesting possibilities that could occur as a result may be the aggressive expansion by smaller competitors to ensure their survival, or more acquisitions by BT to maintain their position as the leading market provider.