Telefonica slashes value of Virgin Media 02 by £1.5bn

TELEFONICA has written down the value of its stake in Virgin Media O2 by €1.8bn (£1.5bn) as the telecoms company grapples with soaring debt costs.

The Spanish mobile giant said it had booked a €1.8bn goodwill impairment in its 50pc stake in VMO2, blaming rising interest rates and “broader macroeconomic conditions in the UK”.

VMO2 was valued at £31bn when it was created following the merger of Virgin Media and O2 in 2021 by parent companies Telefonica and Liberty Global. The deal left VMO2 with debts of £20bn at the time, though borrowings have since reduced to £8bn.

The company’s valuation has come under pressure after the recent rise in interest rates pushed up the cost of borrowing for the heavily indebted telecoms business.

VMO2 swung to a £3.6bn loss in 2023, largely because of high debt servicing costs. The interest rate charged on the majority of its debts are linked to benchmarks, meaning they move in line with movements in the base rate.

Karen Egan, head of mobile at Enders Analysis, described the telecoms group as “highly levered”.

She added: “In a world of low rates it made absolute sense to lever everything up as much as you could get away with.

With rates now rising, the tolerance for that level of leverage is lower.”

Telefonica said it expected the downturn to impact future cash flow. VMO2, which has 45m customers across broadband, TV and mobile, has forecast free cash flow of around £500m in 2024.

High debt costs are adding to challenges at VMO2, amid tough competition. Rivals Vodafone and Three have agreed to merge in a £15bn deal that will create the UK’S largest mobile network with 27m customers. The tie-up is facing scrutiny on both competition and national security grounds. Both VMO2 and Bt-owned EE are expected to demand concessions from regulators on issues such as mobile spectrum.

Under the terms of the merger, both Telefonica and Liberty Global have the right to initiate an initial public offering for VMO2 three years after the deal closed. That deadline is approaching in June. Mike Fries, chief executive of Liberty Global, has previously said he is open to selling off the stake in VMO2. However, an IPO is not thought to be likely under current market conditions.

Telefonica’s long-term plans for its stake in VMO2 are unclear. However, the Spanish firm has made two previous unsuccessful efforts to offload O2.

A Virgin Media O2 spokesman said: “As required, we assess the value of our business on an annual basis.”