Virgin and O2 mega-merger given the green light by competition watchdog

The UK's competition watchdog has ruled that the deal won't harm competition, even though the merger is expected to shift industry trends significantly.

broadband.jpg

O2 and Virgin are joining forces in a joint venture that brings together broadband and mobile.  

Image: Stock Unlimited

The UK's competition watchdog has approved a £31 billion ($42.6 billion) mega-merger between Virgin Media and O2 that's expected to create one of the country's largest fixed and mobile network services companies.

Even though the deal brings together two major players in UK telecoms, the Competitions and Markets Authority (CMA) has provisionally concluded that the merger is unlikely to harm consumers or rival businesses as a result of anti-competitive practices. 

Liberty Global, the parent company of Virgin Media, and Telefonica, which owns O2, announced last year that they were joining forces, in a 50-50 joint venture that brings together broadband and mobile. With 34 million users, O2 is currently the leading mobile network operator in the UK, while Virgin is focusing on deploying gigabit-capable broadband.

The deal values O2 at £12.7 billion ($17.5 billion) and Virgin at £18.7 billion ($25.7 billion); and according to the companies, the joint venture will generate £11 billion ($15 billion) annual revenue, on top of £6.2 billion ($8.5 billion) of synergies from the financial benefits enabled by the merger. More cost savings will be achieved as network infrastructures, IT systems and administration expenses are combined.

SEE: Guide to Becoming a Digital Transformation Champion (TechRepublic Premium)

From a consumer perspective, the deal is not problematic: the retail services provided by the two companies hardly overlap, meaning that the partnership does not create a significantly stronger player in either the fixed-line or mobile markets. 

In fact, a similar partnership was previously approved by the CMA in 2016, when broadband giant BT bought mobile network operator EE for £12.5 billion ($17.2 billion), which enabled BT to start offering bundled subscriptions of broadband, mobile, pay-TV and landline services.

More problematic, according to the CMA, is the potential that the deal has to disrupt wholesale services provided by Virgin and O2 to other mobile network operators (MNOs).

Virgin, in effect, supplies some of its leased lines to MNOs like Vodafone or Three, which enables these operators to connect key parts of their network to the telecoms grid, and is set to become a key factor in switching the country to 5G connectivity. After BT, Virgin is the second largest supplier of leased lines in the UK. 

O2, for its part, also supplies wholesale mobile services to operators that do not have their own networks, such as Sky or Lycamobile.  

In this closely interconnected ecosystem, it's easy to see why a merger between O2 and Virgin could lead to changes in access to leased lines and mobile networks for rival businesses. This is why the CMA set out to investigate the risk of Virgin and O2 raising prices or reducing the quality of their wholesale services, or even of withdrawing them altogether.

If this were to happen, observed the CMA, not only could the quality of other companies' services suffer, but consumers could also see prices increase as a result of higher wholesale costs. 

After months of analysis, however, the competition watchdog has ruled that the deal will pose no major threat to competition. In both the leased-line and mobile network markets, said the CMA, there are a number of other players offering similar services, meaning that O2 and Virgin will need to maintain competitive services or risk losing wholesale customers. 

BT, in particular, is in a strong position to compete against Virgin for the supply of leased lines, with almost ubiquitous UK coverage and a larger market share.

"Given the impact this deal could have in the UK, we needed to scrutinize this merger closely," said Martin Coleman, CMA Panel Inquiry chair. "A thorough analysis of the evidence gathered during our phase 2 investigation has shown that the deal is unlikely to lead to higher prices or a reduced quality of mobile services -- meaning customers should continue to benefit from strong competition." 

SEE: 5G and edge computing: How it will affect the enterprise in the next five years

With the merger expected to go through this year, it seems that the UK telecoms market is increasingly shifting towards the convergence of broadband and mobile, following the model first set by BT and EE a few years ago.

For Kester Mann, industry analyst at CCS Insights, the Virgin/O2 mega-merger is the first of more to come. "The blockbuster merger will transform the UK telecoms landscape and create a powerful new converged provider to rival BT," he says. 

"The deal could still trigger a ripple effect on the UK market: further deal-making -- potentially including Vodafone, Three and Sky -- can't be ruled out."

The CMA insisted that the findings were provisional, and invited any parties to contribute representations about the results of the analysis in the next few weeks.