Telefónica has finally reached an agreement with Liberty Global to merge its UK businesses, O2 Holdings and Virgin Media UK respectively, and form a 50/50 joint venture. The merger would make the new group the UK market leader with a 34% market share compared to BT’s 32%. This integration is the largest transaction in Telefónica’s history. Whatsmore, it will always be remembered for having happened in the midst of the restrictions determined by the confinement in the two countries.
The transaction will create an integrated telecommunications provider in the UK with over 46 million video, broadband and mobile connectivity subscribers. It will have revenues of approximately 11 billion pounds sterling (approximately 12.56 billion euros), OIBDA (operating income before depreciation and amortization) of 3.6 billion pounds sterling (4.1 billion euros) and free cash flow from operations (before synergies) of 1.5 billion pounds sterling (1.7 billion euros). The operation is expected to close mid-2021 after the corresponding regulatory approvals are obtained.
Santander Credit Research analysts consider that the combination of both companies, once implemented, will solve one of Telefónica’s main strategic problems:
“The future of O2 UK as a mobile operator in a converged telecommunications sector will be clear. Furthermore, we believe that with this transaction Telefónica will retain exposure to the UK as one of its central pillars (along with Spain, Germany and Brazil)”.
For Bankinter’s experts, the transaction also makes strategic sense:
“Telefónica’s UK subsidiary O2 offers only mobile services while Liberty provides broadband, fixed-line and TV services. So their merger creates an integrated teleco which will be a strong competitor for BT, the industry leader so far. It will also allow the launch of convergent offers to gain market share and improve margins.
In addition, the transaction is expected to generate the following:
1) synergies of 6.25 billion pounds (about 7.13 billion euros) of which 65% are costs and 15% are capex.
(2) a net present value excluding integration costs, capex and revenues of GBP 540 million/year (approximately €616 million), starting in the fifth year following completion of the transaction; and
3) a positive free cash flow from the first year for Telefónica, which is expected to receive between 5,500-5,700 million pounds sterling of total funds (6.300- 6.500 billion euros). This will be used to cut Telefónica’s total net debt by 16.5%-17% (38.22 billion euros in Q1’20).
In addition, Telefónica will also receive a compensatory payment of 2,500 million pounds sterling (2.85 billion euros approximately).
The joint venture has set a net debt target of 4-5 times operating income before depreciation and amortization (OIBDA).
Finally, the parties have agreed on mechanisms to restrict the transfer of the JV’s shares to third parties, which will last up to five years after the close of the operation. From then onwards, the partners may transfer their stake to a third party, subject to a preferential acquisition right granted in favour of the other partner.