By David Okubadejo, M&A Analyst at the KCL M&A Society
Telefonica’s 02 to combine their UK assets with Virgin Media in a joint venture to operate nationally within Great Britain and Northern Ireland.
Deal Introduction
Date of Announcement: 07/05/2020
Value: $38 billion
In May of last year, O2 and Broadband-Satellite operator Virgin Media declared they were pursuing a merger for their operations for an immense $38 billion. The change appears to be a natural progression in the telecommunications industry within the UK, as this new entity can compete with BT & EE. As 02 is a mobile operator and Virgin being a fixed operator providing data and broadband respectively, they complement each other’s deficiencies. Each operator can provide adequate access to their built infrastructures and clientele. Senior officials in both 02 and Virgin have proclaimed that the new entity will be well equipped to take on the size and scale of BT in the UK.
The new enterprise will confront Sky and BT’s respective market shares by proposing customers competitive Broadband, Mobile and Television packages, in addition to maintaining and growing its £11bn in revenue and 46 million customers. Liberty Global’s CEO Mike Fries stated that it was only “a matter of time” In the highly competitive UK media and telecoms industry, till there was further convergence. He also stated that
“With Virgin Media and O2 together, the future of convergence is here today.” The new enterprise will invest to advance its telecommunications infrastructure incorporating 5G networks and Giga speed broadband.
CMA Scrutiny
An investigation into the merger began in December of 2020 by the CMA (Competition and Markets Authority). In its initial report, the CMA emphasised two areas of possible concern. The authority will pay extra attention to O2’s service leasing to mobile secondary operators, for example, giffgaff, Lycamobile, Sky Mobile and Tesco Mobile, which utilise its mobile network to offer network services to their clientele via their own trademarks.
The authority supposed that the Joint venture might confine the supply of these services, hypothetically leading to concentrated options for mobile operators or to inferior contracts for the respective operators which would be in breach of 1998 Competition Act Chapter I. The CMA is also analysing Virgin Media’s being a top 2 wholesaler of leased lines, which connect core network to radio base positions. Virgin Media supplies a major network such as Three, therefore a conflict of interest is plausible.
The authority has stated that the merger could lead the new entity to raise the price of these lines and limiting their offering. In particular, the reduction of offerings to lease their services would be a violation of the 1998 Competition Act Chapter II as it would be a reduction in “supply of services” privy to a competitive advantage.
Issues Raised by Competitors
SKY UK and Vodafone published their responses to the CMA’s ongoing investigations into the proposed merger further raising concerns pertaining to the competition. In Sky’s case, their chief trepidation is the logical risk of “input foreclosure”, i.e. an instance in which the new entity refuses to supply competitors with an essential input they require, in hopes of raising prices and gaining market share. “O2’s incentives to provide wholesale mobile services on favourable terms will materially reduce as the Merged Entity pursues increased uptake of fixed/mobile bundles benefiting from its converged and vertically integrated operation,” said Sky. Sky opens their published response stating that this fear is not merely theoretical’ as they claim to have previously exhausted “significant amounts of time and resources” to defend Sky Mobile’s position versus such a risk.
Nonetheless, the O2-Virgin Media coalition responded, stating that the new entity “will have neither the ability nor the incentive to foreclose other MNOs and such a strategy would, in any event, have no material effect on competition in the retail mobile market.” These criteria, such as ability and incentive, in actuality form part of the legal test for input foreclosure, i.e. whether a merger is anti-competitive, demonstrating 02 and Virgins pre-merger due diligence.
Individually, Vodafone has a natural inclination to stand against the proposed merger as a juggernaut entity on par with BT and EE Is bound to reduce their dwindling market share. Indirect reference to this, they said in their statement that: “If this transaction proceeds, as mentioned above 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.”
Previous CMA Interaction
What must be considered during the early stages of this merger proposal are previous CMA decisions. By having allowed the merger of BT and EE, the CMA leave themselves open to a contradictory position on telecommunications mergers.
The CMA gave clearance to BT’s £12.5 billion acquisition of EE (Britain’s largest mobile phone network) in 2016. Citing that they were under no impression that the takeover may lead to a considerable decline in competition or detrimental impact on consumers in any market in the United Kingdom, not withholding mobile and broadband services.
BT is the prevailing provider of broadband amenities in Great Britain and Northern Ireland, and EE’s 27 million consumers make it the prevalent mobile phone operator. Through its Openreach subsidiary, BT also retains the infrastructure through which the vast majority of the UK’s broadband is concentrated hosting other companies such as Sky, as well as offering faculty to mobile operators for data transfers between other networks and masts. Surely a merger of two influential entities such as BT and EE must raise concerns greater than O2 and Virgin when BT hosts the actual physical infrastructure such as phone masts.
However, what must also be considered is mergers are on a first come, first served basis and the changes to market shares and competition are different in each independent case as mergers are a fact-sensitive analysis. Nonetheless, it would not be out of the question for the CMA to lay out numerous requirements from the merged company before the deal is approved which for all intents and purposes will just be a formality.
Conclusive Remarks
As of now, it is glaringly apparent that the 02-Virgin media merger will go ahead despite current concerns from the CMA and respective competitors and clients. The BT-EE Merger had arguably greater implications for competition in the Telecommunications space, but went ahead after deliberations; the CMA requirements became merely a formality. Moreover, if the precedent set by the CMA’s approval of the BT-EE Merger is not enough, the parent companies of 02 and Virgin Media have pledged to expand the new entity’s gigabit broadband by a supplementary 1 million sites, within 12 months of the merger.
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KCL Mergers & Acquisitions Society
The KCL M&A Society (KMA) was founded with the goal of providing students with valuable information and opportunities regarding the field of Mergers & Acquisitions. KMA aspires to provide students with a platform to learn and improve their skills whilst delving into the synergies of law and finance.