Key Highlights
- 50-50 joint venture brings together Virgin Media,
the U.K.’s fastest broadband network, and O2, the country’s
largest mobile platform
- Combination creates a stronger fixed and mobile
competitor in the U.K. market, supporting the expansion of
Virgin Media’s giga-ready network and O2’s 5G mobile deployment for
the benefit of consumers, businesses and the public sector
- Fully converged platform will put customers first and
have the scale to innovate in the changing digital landscape,
investing £10 billion in the U.K. over the next five
years
- Joint venture expected to deliver substantial synergies
valued at £6.2 billion on a net present value basis after
integration costs, and equivalent to cost, capex and revenue
benefits of £540 million1 on an annual basis by the fifth full year
post-closing
- Attractive valuation for both businesses, with O2 valued
at £12.7 billion and Virgin Media valued at £18.7 billion, both on
a total enterprise value basis. O2 to be transferred into the joint
venture on a debt-free basis, while Virgin Media to be contributed
with £11.3 billion of net debt and debt-like items2
- Both parties expect to receive net cash proceeds at
closing following a series of recapitalizations that will
generate £5.7 billion in proceeds for Telefonica and £1.4 billion
for Liberty Global (after an equalization payment to Telefonica of
£2.5 billon3)
- Joint venture will target ongoing net leverage of
4.0-5.0x, with proceeds from any future free cash flow
generation and financing to be distributed equally between
Telefonica and Liberty Global
- The transaction is expected to close around the middle of
2021 and is subject to regulatory approvals, consummation of
the recapitalizations, and other customary closing conditions
Telefonica Chief Executive Officer, Jose Maria Alvarez-Pallete,
said, “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. 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 organisations,
as we create a leading integrated communications provider in the
U.K.”
Mike Fries, Chief Executive Officer of Liberty Global, said, “We
couldn’t be more excited about this combination. 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.”
Strategic Combination
Liberty Global plc (NASDAQ: LBTYA, LBTYB and LBTYK) and
Telefonica SA (Madrid stock exchange: TEF) today announced an
agreement to merge their operating businesses in the U.K. to form a
50:50 joint venture (the “JV”). The combination of Virgin Media and
O2 will create a nationwide integrated communications provider with
over 46 million video, broadband and mobile subscribers and £11
billion of revenue.4
By combining Virgin Media’s market-leading v6 video service and
giga-ready broadband network, together with O2’s best-in-class, 5G
ready mobile propositions, U.K. consumers will enjoy the
highest-quality customer experience possible, with superior
connectivity and entertainment both inside and outside the home. As
a fully converged provider, the JV will provide more competition in
the marketplace and choice for consumers.
In addition, the JV will become a leading challenger in the B2B
space as the combination will accelerate the adoption of converged
fixed-mobile services to Virgin Media’s and O2’s existing business
customers and offer new services using both companies’ digital
skills, networks and product portfolios, such as cloud, big data,
Internet of Things and cybersecurity services. This will ensure
sustainable competition in the small, medium and large business
segments across the U.K., which will benefit the overall British
economy.
Financial Profile of the Joint Venture5
Telefonica and Liberty Global will ensure that the JV will
benefit from the scale and complementary expertise of each partner.
To accomplish that objective, the parties have agreed to provide a
suite of services to the JV after closing. These services will
principally consist of IT and technology-related services,
procurement, brand management and other support services. The
annual charges to the JV will ultimately depend on the actual level
of services required by the JV.
Separate financial information for Virgin Media and O2 is
presented below for the 12 months ended December 31, 2019.
£m; December 31, 2019
Virgin
Media
£m; December 31, 2019
O2
Revenue 2019
4,766
Revenue 2019
6,235
OCF 20196
2,042
EBITDA 2019
1,661
Estimated Direct and Indirect
Costs
Incremental Shareholder
Services7
40
Estimated Incremental Shareholder
Services9
41
OCF 2019 After Estimated
Direct and Indirect
Costs Incremental Shareholder
Services
2,002
EBITDA 2019 After Estimated
Incremental Shareholder Services
1,620
Estimated Capital expenditure
related
Incremental Shareholder
Services
85
Estimated Capital expenditure
related
Incremental Shareholder
Services
-
OCF 2019 After Estimated
Incremental
Shareholder Services
1,917
EBITDA 2019 After Incremental
Shareholder Services
1,620
Property & Equipment
Additions 2019
(1,166)
Capital Additions 2019
(801)
Operating Free Cash Flow 2019
751
Operating Free Cash Flow 2019
819
The JV intends to distribute available cash to the shareholders
periodically and is expected to undertake periodic further
recapitalizations, subject to market and operating conditions, to
maintain its 4.0x-5.0x target net leverage ratio8. Between signing
and closing, each party will retain the free cash flow of their
respective operations. Liberty Global will transfer effectively all
of its UK tax capital allowances and tax loss carry-forwards, which
primarily resulted from prior infrastructure investments, at
closing to be utilized by the JV. Each party will fund the deficit
in their respective defined benefit pension schemes, arising from
the next triennial actuarial valuation.
Neither Telefonica nor Liberty Global will consolidate the JV
after the closing.
Transaction Details
The transaction will include a series of recapitalization
financings prior to closing to reach its target closing net
leverage ratio for the JV of 5.0x, or approximately £18 billion of
long-term debt. Net new proceeds from the recapitalizations are
targeted to be approximately £6 billion. After taking into account
the recapitalizations, Telefonica is expected to receive £5.7
billion in total proceeds from the transaction. Liberty Global is
expected to receive £1.4 billion in total, including approximately
£800 million from the recapitalization of its retained and 100%
owned Virgin Media Ireland business. The transaction will not
trigger a change of control under Virgin Media’s existing
third-party debt that will be contributed in full to the joint
venture. As part of the transaction, a syndicate of banks has
underwritten a £4 billion standalone undrawn financing on the O2
business.
These transaction proceeds will be determined based upon (i)
equalization payments to take into account the relative valuation
of the two businesses and (ii) the proceeds generated from the
recapitalization transactions. With respect to the equalization
payments, based upon the enterprise value of each business, and
after deducting debt and debt-like items, Liberty Global will make
a cash payment to Telefonica of £2.5 billion. However, this payment
by Liberty Global will be offset by receipt of proceeds from the
recapitalizations described above such that at closing Liberty
Global receives cash proceeds from the transaction.
Synergy Opportunity
The JV is expected to generate significant operating benefits,
with estimated run-rate cost, capex and revenue synergies of £540
million1 on an annual basis by the fifth full year post closing,
equivalent to a net present value of approximately £6.2 billion
post tax and net of integration costs, as well as significant
synergies from the accelerated usage of existing tax assets.
The vast majority of the benefits relate to demonstrable cost
and capex synergies, with an annual run-rate of approximately £430
million out of which approximately 80% are expected to be achieved
by the third full year after the closing. The key expected sources
of cost and capex synergies include:
- Use of existing infrastructure to provide
services for each entity’s customers at lower cost compared to
standalone / wholesale capabilities;
- Migration of Virgin Media mobile traffic to
Telefonica UK’s network;
- Combination of regional and national network
infrastructures and IT systems;
- Reduction in combined marketing
expenditures;
- Potential to reduce general and administration
costs; and
- Site rationalization
In addition, the JV is expected to realize significant growth
through cross-selling opportunities and scale, resulting in revenue
synergies with an estimated annual run-rate of approximately £110
million on an annual basis.
To achieve these synergies, the JV expects to incur
approximately £700 million of integration costs, most of which
should be incurred in the first four years after the closing.
With extensive track records of delivering value creation,
Liberty Global and Telefonica bring significant experience in the
integration and execution of identified synergies in the context of
in-country consolidations and convergence transactions across
Europe and worldwide.
Management, Governance and Liquidity Provisions
Executive leadership of the JV will be agreed prior to the
closing. The board will consist of eight members, four from each of
Liberty Global and Telefonica. Mr. Fries, CEO of Liberty Global,
and Mr. Alvarez-Pallette, CEO of Telefonica, will sit on the board.
The post of Chairman will be held for alternating two-year periods
by Liberty Global or Telefonica with Liberty Global holding the
position first.
Each shareholder has the right to initiate an initial public
offering of the JV after the third anniversary of the closing. The
parties have agreed to restrictions on other transfers of interests
of their shares in the JV until the fifth anniversary of closing.
After the fifth anniversary, each shareholder will be able to
initiate a sale of the entire JV to a third party, subject to a
right of first offer in favor of the other shareholder.
Closing Conditions and Indicative Timetable
Liberty Global and Telefonica anticipate that closing of the
transaction is expected to take place around the middle of
2021.
The transaction is subject to regulatory approval. Liberty
Global and Telefonica have already undertaken preparatory work on
the required competition filing and will formally request approval
from the appropriate authority in due course. The transaction is
also subject to a condition that the recapitalizations have
occurred and other closing conditions customary for transactions of
this type.
With respect to the upcoming U.K. spectrum auction, each party
will operate as standalone entities and make independent decisions
regarding strategy and participation. As such, each party will bear
its own individual costs for the auction.
The transaction is not subject to Telefonica or Liberty Global
shareholder approvals. Liberty Global’s Irish operations are not
part of the transaction.
Investor and Analyst Calls
Telefonica is hosting a conference call on Thursday, May 7, 2020
for analysts and investors, which will start promptly at 10.00 a.m.
(London time). Please dial into this conference call using the
following numbers:
UK Participant dial in Toll:
+44 (0)330 336 9401
UK Participant dial in
Toll-Free:
0800 279 4827
US Participant dial in Toll:
+1 929-477-0338
US Participant dial in
Toll-Free:
800-289-0459
Participant Passcode: 196368
Liberty Global is hosting a conference call on Thursday, May 7,
2020 for analysts and investors. The call will start promptly at
09.00 a.m. (New York Time). During the call Liberty Global will
discuss its Q1 2020 results and business, and expects to address
the joint venture, comment on the company’s outlook and provide
other forward-looking information.
Please dial into this conference call using the following
numbers:
United States
+1 720 543 0210
International
+1 888 378 4398
The conference passcode is 852843. The conference call will also
be webcast live from www.libertyglobal.com
Transaction Advisers
In connection with the transaction, J.P. Morgan and LionTree
Advisors are acting as financial advisers to Liberty Global, and
Allen & Overy is acting as legal adviser to Liberty Global,
with Shearman & Sterling providing U.S. legal advice. Citigroup
is acting as financial adviser to Telefonica and Clifford Chance
and Herbert Smith are acting as legal adviser to Telefonica.
Deal Website
To find out more and to follow our progress, visit
www.nationalconnectivitychampion.co.uk
About Telefonica
Telefónica is one the largest telecommunications service
providers in the world. The company offers fixed and mobile
connectivity as well as a wide range of digital services for
residential and business customers. With 344 million customers,
Telefónica operates in Europe and Latin America.
Telefónica is a 100% listed company and its shares are traded on
the Spanish Stock Market and on those in New York and Lima.
About Liberty Global
Liberty Global (NASDAQ: LBTYA, LBTYB and LBTYK) is one of the
world’s leading converged video, broadband and communications
companies, with operations in six European countries under the
consumer brands Virgin Media, Telenet and UPC. We invest in the
infrastructure and digital platforms that empower our customers to
make the most of the digital revolution. Our substantial scale and
commitment to innovation enable us to develop market-leading
products delivered through next-generation networks that connect 11
million customers subscribing to 25 million TV, broadband internet
and telephony services. We also serve 6 million mobile subscribers
and offer WiFi service through millions of access points across our
footprint.
In addition, Liberty Global owns 50% of VodafoneZiggo, a joint
venture in the Netherlands with 4 million customers subscribing to
10 million fixed-line and 5 million mobile services, as well as
significant investments in ITV, All3Media, ITI Neovision,
Lionsgate, the Formula E racing series and several regional sports
networks. For more information, please visit
www.libertyglobal.com.
Forward Looking Statements
This press release contains forward-looking statements within
the meaning of the U.S. Private Securities Litigation Reform Act of
1995. In this context, forward-looking statements often address
expected future business and financial performance and financial
condition, and often contain words such as “expect,” “anticipate,”
“intend,” “plan,” “believe,” “seek,” “see,” “will,” “would,” “may,”
“target,” and similar expressions and variations or negatives of
these words. These forward-looking statements may include, among
other things, statements relating to the outlook in the U.K. of
Telefónica, S.A. (“Telefónica”) and Liberty Global plc (“Liberty
Global”) and their respective operating companies O2 UK and Virgin
Media; operational expectations, including with respect to the
development, launch and benefits of innovative and advanced
products and services, including gigabit speeds, new technology and
next generation platform rollouts or launches; future growth
prospects and opportunities, results of operations, uses of cash,
share repurchases, tax rates, and other measures that may impact
the financial performance of the companies; anticipated benefits
and synergies and estimated costs of the proposed transaction; the
expected timing of completion of the proposed transaction; and
other information and statements that are not historical facts.
These forward-looking statements involve certain risks and
uncertainties that could cause actual results to differ materially
from those expressed or implied by these statements. These risks
and uncertainties include events that are outside of the control of
the parties, such as: (i) Telefónica, Liberty Global, and our
respective operating companies’ ability to meet challenges from
competition and to achieve forecasted financial and operating
targets; (ii) the effects of changes in laws or regulations; (iii)
the effects of the U.K.’s exit from the E.U.; (iv) general
economic, legislative, political and regulatory factors, and the
impact of weather conditions, natural disasters, or any epidemic,
pandemic or disease outbreak (including COVID-19); (v) Telefónica,
Liberty Global, and our respective affiliates’ ability to obtain
regulatory approvals and satisfy other conditions to the
consummation of the proposed transaction; (vi) the proposed
transaction may not be completed on anticipated terms and timing or
completed at all; (vii) Telefónica, Liberty Global, and our
respective affiliates’ ability to successfully integrate the
combined businesses and realize anticipated efficiencies and
synergies from the proposed transaction; (viii) the outcome of any
potential litigation that may be instituted with respect to the
proposed transaction; (ix) the potential impact of unforeseen
liabilities, future capital expenditures, revenues, expenses,
economic performance, indebtedness, financial condition on the
future prospects and business of the combined business after the
consummation of the proposed transaction; (x) successful closing of
expected financing and recapitalization transactions undertaken in
connection with the proposed transaction and risks associated such
transactions; (xi) any negative effects of the announcement,
pendency or consummation of the proposed transaction; and (xii)
management’s response to any of the aforementioned factors. For
additional information on identifying factors that may cause actual
results to vary materially from those stated in forward-looking
statements, please see Telefónica’s and Liberty Global’s respective
filings with the U.S. Securities and Exchange Commission, including
Liberty Global’s most recently filed Form 10-Q and Telefónica’s
most recently filed Form 20-F, as well as the documents filed by
Telefónica before the different supervisory authorities of the
securities markets in which its shares are listed and, in
particular, the Spanish National Securities Market Commission.
These forward-looking statements speak only as of the date of this
release. Telefónica and Liberty Global expressly disclaim any
obligation or undertaking to disseminate any updates or revisions
to any forward-looking statement contained herein to reflect any
change in expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is
based.
1 The £540 million synergies estimate is comprised of £350
million of cost savings, approximately £80 million of capex and
£110 million of revenue synergies. Additional tax synergies may be
realized. 2 Virgin Media’s £11.3 billion of net debt is based upon
third-party net debt and transaction related debt-like adjustments
as of December 31, 2019 and is subject to customary closing
adjustments. O2 is subject to £0.3 billion of transaction related
debt-like and working capital adjustments as of December 31, 2019
and is subject to customary closing adjustments. 3 Equalisation
payment after taking into account debt and debt-like items and
customary normalised working capital adjustment as if completion
occurred on the 31st of December 2019. 4 Represents combined
revenue generating units of Liberty Global and Telefonica (as
defined by each) as at December 31, 2019. 5 Virgin Media amounts
are prepared under United States Generally Accepted Accounting
Principles and Telefonica O2 amounts are prepared under
International Financial Reporting Standards used in the European
Union. Therefore amounts shown have been calculated under different
standards. 6 For Virgin Media, OCF represents operating income
before share-based compensation, related-party fees and
allocations, depreciation and amortization, impairment,
restructuring and other operating items. Includes £37 million in
charges from Liberty Global in 2019. These services are expected to
continue post transaction. 7 Represents estimated additional
charges that we expect will be reported in OCF post transaction for
services provided, and for use of assets retained, by Liberty
Global. 8 Including charges in connection with all Incremental
Shareholder Services and liabilities associated with operating
leases.
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Telefonica Investor
Relations Telephone +34 91 482 87 00 Pablo Eguirón
(pablo.eguiron@telefonica.com) Isabel Beltrán
(i.beltran@telefonica.com) Adrián Zunzunegui
(adrian.zunzunegui@telefonica.com)
Media Relations Telephone +34 91
482 3628 Fiona Maharg (fiona.maharg@telefonica.com)
Liberty Global Investor
Relations Matt Coates +44 20 8483 6333 John Rea +1 303 220
4238 Stefan Halters +44 20 8483 6211
Corporate Communications Molly
Bruce +1 303 220 4202 Matt Beake +44 20 8483 6428
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