O2 and Virgin Media eyeing potential mega-merger

● Firms stress talks remain at exploratory stage ● Tie-up would create major rival for BT Group

Mobile operator O2 is in talks to merge with Virgin Media in a move which would create one of the UK’S largest telecoms and media firms.

Telefonica, O2’s Spanish owner, confirmed it is in discussions with Virgin-owner Liberty Global over a deal between the two firms.

It stressed that it is currently in the “negotiation phase”, and it is not guaranteed that the two parties will agree a deal.

A tie-up between the two companies would create a major rival for BT, which owns EE, the UK’S second largest mobile network. It would bring together O2’s 34 million customers on its mobile network with Virgin’s 5.3 million broadband, pay-tv and mobile users.

O2, which also provides the network for Giffgaff, Tesco Mobile and Sky Mobile, is the UK’S largest phone company.

Telefonica has been examining options for the O2 business since 2016, after a planned takeover by CK Hutchinson, which owns fellow mobile operator Three, was blocked by European competition regulators.

Talks between O2 and Virgin Media also raise questions over the future of Virgin’s mobile operations, which were due to be taken over by Vodafone later this year.

In November, Vodafone won the five-year contract from Btowned EE.

Paolo Pescatore, tech and media analyst at PP Foresight, said: “This is an intriguing move. For sure, it is more likely to appease regulators than two mobile operators coming together.

“Also, let’s not forget the parents of both companies have been keen to offload these assets for a while. Therefore, there is more to this than simply convergence and competing with BT and Sky.”

Professor John Colley, associate dean at Warwick Business School, said: “This may be an opportunistic merger attempting to take advantage of the perceived change in policy from the CMA [Competition and Markets Authority].

“In recent weeks it has become apparent that the CMA has become more focused on the survival of business as a priority over maintaining a competitive market.

“However O2 and Virgin Media are businesses benefiting from the present Covid-induced state of affairs. One suspects that the CMA will take a keen interest in this merger.

“All the evidence from other countries suggests that in the telecoms and broadband market that the levels of supplier concentration directly influence profits and prices.

“Where there are three competitors, profits and prices tend to be much higher than where there are four or five competitors. It seems unlikely that customers can gain from this merger as it is unlikely that sufficient competition will remain after the merger.”