When consummated, an event the two parties expect will take place by the middle of next year, the joint venture will serve more than 46 million video, broadband, and mobile subscribers and boast £11 billion of revenue.

Author - Stephen Hardy May 2020

Liberty Global plc (NASDAQ: LBTYA, LBTYB and LBTYK) and Telefonica SA (Madrid stock exchange: TEF) have reached an agreement to merge their operations in the UK into a joint venture. The merger, valued at £31.4 billion ($38 billion) will see the combination of Liberty's Virgin Media cable MSO with Telefonica's O2 mobile services provider. When consummated, an event the two parties expect will take place by the middle of next year, the joint venture will serve more than 46 million video, broadband, and mobile subscribers and boast £11 billion ($13.6 billion) of revenue. The joint venture does not include Liberty Global's operations in Ireland.

The joint venture, which doesn't yet have a name, would pose a significant rival to British Telecom in the UK residential and business services markets. Liberty Global and Telefonica say the new entity will invest £10 billion ($12.36 billion) in the UK over five years.

“Combining O2's number one mobile business with Virgin Media's superfast broadband network and entertainment services will be a game-changer in the U.K., at a time when demand for connectivity has never been greater or more critical," commented Jose Maria Alvarez-Pallette, CEO of Telefonica. “We are creating a strong competitor with significant scale and financial strength to invest in UK digital infrastructure and give millions of consumer, business, and public sector customers more choice and value. This is a proud and exciting moment for our organizations, as we create a leading integrated communications provider in the UK."

“We couldn't be more excited about this combination," added Mike Fries, CEO of Liberty Global. “Virgin Media has redefined broadband and entertainment in the U.K. with lightning fast speeds and the most innovative video platform. And O2 is widely recognized as the most reliable and admired mobile operator in the U.K., always putting the customer first. With Virgin Media and O2 together, the future of convergence is here today. We've seen the benefit of FMC first-hand in Belgium and the Netherlands. When the power of 5G meets 1 gig broadband, U.K. consumers and businesses will never look back. We're committed to this market and are right behind the Government's digital and connectivity goals."

The board of the joint venture will have eight members, four from each of the two participating companies. Fries and Alvarez-Pallette will be among the board members. The post of board chairman will be held for alternating two-year periods by someone from each company, with a Liberty Global executive holding the position first.

The deal involves a somewhat complicated recapitalization scheme involving multiple financings that will leave the joint venture a target closing net leverage ratio of 5.0X, or approximately £18 billion ($22.25 billion) of long-term debt. Net new proceeds from the recapitalizations are expected to be approximately £6 billion. With the recapitalizations, Telefonica expects to receive £5.7 billion in total proceeds and Liberty Global £1.4 billion ($1.73 billion), including approximately £800 million from the recapitalization of its Virgin Media Ireland business. As part of the deal, a syndicate of banks has underwritten a £4 billion standalone undrawn financing on the O2 business.

The transaction also includes equalization payments, based upon the enterprise value of each business involved in the joint venture. Within this context Liberty Global will make a cash payment to Telefonica of £2.5 billion ($3.1 billion). Liberty Global expects this payment will be offset by funds from the recapitalizations, which will result in the Liberty Global netting cash from the deal.

The two parties expect the joint venture generate estimated run-rate cost, capex, and revenue synergies of £540 million ($667.63 million) on an annual basis by the fifth full year after closing. Approximately £430 million ($531.63 million) of this total would come from cost and capex synergies, say Liberty Global and Telefonica.

The transaction is subject to regulatory approval and the completion of the recapitalizations, but not shareholder approval.

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