Virgin Media and O2 tipped as final UK mega deal

The joint venture between Virgin Media and O2 that was announced in June probably won't trigger a wave of UK communications sector M&A, according to new analysis from Bloomberg Intelligence (BI).

BI expects that the merger which created Virgin Media O2 is unlikely to trigger a chain reaction of mergers, due to the fact that there aren't many easy or credible deal options left on the table.

BI believes that Vodafone and Sky may consider combining to create a third infrastructure-based converged-player, but Vodafone's enterprise-customer bias could be problematic, and Sky's parent company, US-based conglomerate Comcast, has more pressing domestic issues to deal with. 

Vodafone might therefore look again at the now privately-held TalkTalk to help boost scale in the broadband market and improve full fibre economics. 

Mobile carrier Three looks set with its go-it-alone strategy following the merger with its Irish sibling in early 2020.

A mid-term deal between Sky and Virgin-O2 to create a communications behemoth can't be ruled out, in BI’s view, providing parent companies Telefonica and Liberty with an exit path.

BI also expects that interest in ITV is likely low, but it could still be a long term fit for BT or Virgin-O2.

Matthew Bloxham, Senior Analyst for Technology, Media and Internet at Bloomberg Intelligence, said: “Our analysis highlights that there aren't many more UK telecom deals that make much strategic sense. 

"Out of the deal possibilities we have identified, only a combination of Sky and Vodafone could rival the synergy opportunity created by the merger of Virgin Media and O2.

“Cashflow generation capacity is becoming more important as investment demands increase to build full fibre and 5G networks. 

"Acquiring TalkTalk may have given Vodafone better negotiating leverage with full fibre infrastructure platforms such as Openreach and CityFibre, but the synergy prize would've been small. TalkTalk has already significantly cut operating costs.”

Virgin-O2 will rank as the second biggest UK communications provider by revenue and third by operating free cash-flow, BI’s analysis shows. 

The financial performance gap with Sky and BT may close over time as merger synergies are realised, and BT's cash-flow is squeezed by full-fibre capex.

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