Merging with an UNITED KINGDOM cellular network could produce interesting synergies all the way to 700m a-year, Liberty Global boss Mike Fries stated in September. However this was inadequate for him to follow a deal. Fast ahead seven months and Mr Fries is doing that with Telefnicas O2. Just what exactly changed?
maybe not the possibility cost slices. Suppose that combining Libertys UNITED KINGDOM cable network Virgin Media with O2 unlocked annual cost savings as high as 700m. About 200m of that would originate from migrating customers of Virgin Media, a virtual operator that piggybacks on various other providers sites, off EE as well as on to O2.
The savings would represent only 5 per cent associated with the combined products sales; taxed and capitalised they are worth about 5bn. An additional boost could originate from Virgin Media income tax losses, assisting protect any cash outlay by O2.
Antitrust problems have actually barely dissipated. The latest tie-up would produce a business managing approximately one-third associated with UNITED KINGDOM marketplace by telecoms solutions incomes. Competition authorities nixed Telefnicas quote to sell O2 to CK Hutchisons Three for 10.3bn in 2016, although BTs 12.5bn acquisition of EE got the nod.
the major change since just last year is an exterior one. The coronavirus pandemic has actually put the anxiety virtually on stability sheets. Telefonicas is certainly not pretty. It was sitting on 37.7bn of net debt at the end of 2019, or 3.5 times ebitda on S&P international figures. Assume the offer is organized as some type of leveraged partnership, with a cash top-up from Liberty, provider associated with the weaker assets. There could then be a release of resources to Telefnica. Jefferies estimates this might weigh in at 10.4bn.
After that there are the bankers, newly time-rich as IPO and M&A calendars dematerialise and eager to justify their particular existence. As Mr Fries reviews underline, a deal concerning O2 and Virgin Media is certainly in the cards.
Recasting it as a 50/50 partnership is a vintage rainy time compromise. Permits Telefnica to clear some money while sparing egos that might be knocked-out of joint by a straight takeover or merger.
If two functions are lucky, the structure could even assist assuage the concerns of trust busters. Virgin Mobiles long-suffering customers might see something improvement. Nonetheless, price cuts will always easier to guesstimate rather than realise. At a time when cost savings should really be made anyhow, it really is harder to use them as the reason for a deal.
this informative article is amended to correct Virgins information and community operator
Lex advises the FTs Due Diligence newsletter, a curated briefing on the world of mergers and purchases. Just click here to sign up.