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CMA provisionally clears £31 bn UK merger of Virgin and O2

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The Competition and Markets Authority (CMA) was concerned about wholesale rather than retail activities and possible effects on other mobile service providers.

The UK’s Competition and Mergers Authority has provisionally cleared the proposed merger of Virgin Media and Virgin Mobile with Telefonica UK/O2. The deal is now expected to complete in the middle of this year.

The proposed merger was announced last May, but the CMA's investigation only began last December because before Brexit was concluded, the deal fell under the jurisdication of the European Commission, which was expected to make a provisional ruling in November last year.

Relative values

The deal values Virgin Media, owned by Liberty Global, at £18.7 billion and Telefonica’s O2 at £12.7 billion. The merger will consolidate 34 million customers on O2’s mobile network with Virgin Media and Virgin Mobile’s 5.3 million broadband, pay-TV and mobile users.

The merger will bring together 34 million customers on O2’s mobile network with Virgin Media and Virgin Mobile’s 5.3 million broadband, pay-TV and mobile users.

A statement from Telefonica when the merger was announced said the joint venture will invest £10 billion in the UK over the next five years and deliver “substantial synergies” of £6.2 billion after integration costs, and equivalent to cost, CapEx and revenue benefits of £540 million on an annual basis by the fifth full year after closing the deal.

Wholesale concerns

Virgin Media and O2 provide some wholesale services to other mobile network operators in the UK, as well as retail services to consumers, and this was the main area of focus and concern by the CMA: the overlap between Virgin Mobile and O2 was no seen as an issue given the small size of Virgin Mobile's customer base.

The CMA investigated whether the merger could lead to reduced competition in wholesale services: Virgin Media provides wholesale leased lines to mobile operators Vodafone and Three for as backhaul while MVNOs Sky and Lycamobile run on O2’s network.

The CMA was concerned that after the merger, Virgin and O2 could raise prices or reduce the quality of these wholesale services, or withdraw them altogether, thereby affecting the others' quality of service or putting prices up which would be passed on to consumers.

This could make Virgin and O2’s own mobile service more attractive to retail customers, but would ultimately lead to a worse deal for UK consumers.

Phase 2 investigation

These concerns led to the merger being referred to a group of independent CMA Panel members for an in-depth Phase 2 investigation after which the CMA has provisionally concluded these negative impacts are unlikely because:

• backhaul costs are a relatively small element of rival mobile companies’ overall costs, so it is unlikely that Virgin raising backhaul costs would lead to higher charges for consumers.

• other players offer leased-line services, including BT Openreach, which has a much greater geographical reach than Virgin, so Virgin needs to remain competitive or lose customers itself

• O2 is not the only choice of network for MVNOs hence O2 needs to remain competitive with its wholesale offers.

Martin Coleman, CMA Panel Inquiry Chair, said, "Given the impact this deal could have in the UK, we needed to scrutinise this merger closely.

"A thorough analysis of the evidence gathered during our phase 2 investigation has shown that the deal is unlikely to lead to higher prices or a reduced quality of mobile services – meaning customers should continue to benefit from strong competition."