Telefonica confirms UK business merger talks with Liberty Global

O2 owner Telefonica confirmed on Monday that it is in talks with Virgin Media owner Liberty Global about a potential merger of their UK businesses.

Responding to press reports over the weekend, Telefonica said: "The process started between both parties is in the negotiation phase, with no guarantee, at this point, precise terms or its probability of success."

In a very brief statement, Telefonica said it would provide an update on the talks if a "satisfactory agreement" is reached.

On Friday, Reuters cited sources familiar with the matter as saying that talks were ongoing and focused on creating a joint venture equally owned by the two companies. They said a cash acquisition would be within reach for Liberty, but a joint venture structure could still satisfy Telefonica’s need to reduce leverage.

In a note written before the merger talks were confirmed, Credit Suisse said it had previously argued a deal could have strategic merit for both parties. "It creates a properly convergent player that could more effectively compete with BT and have some competitive edge versus less convergent players (Talktalk/Vodafone/Sky)," CS said, noting that VMED/O2UK are both consumer-focused businesses with opportunities for cross-sale.

CS also said it would generate large opex/capex synergies and that a "deconsolidated JV could arguably sustain higher leverage than as a consolidated entity of a listed business (as happened at VodafoneZiggo), allowing the newco to be levered up further by additional distributions to the two shareholders".