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A new report claims that debt-laden Telefonica SA is allegedly drawing up plans that would enable them to take control of the 50/50 UK Joint Venture (JV) that it owns with Liberty Global, which reflects broadband and mobile provider Virgin Media and O2 (VMO2). In addition, they also have another JV with InfraVia Capital Partners to build a new fibre network in the UK (nexfibre).
The new Bloomberg (paywall) report follows VMO2’s recent quarterly results (here and here), which revealed both a sudden slowdown in nexfibre’s roll-out of their new full fibre (FTTP) broadband ISP network and a “pause” in Virgin Media’s related but technically separate plan to open up their existing fixed broadband network to wholesale via a new NetCo.
Just to recap. Nexfibre is the product of a £4.5bn joint venture (here) between Telefónica, Liberty Global and InfraVia Capital Partners, which originally aimed to deploy an open access full fibre network to reach “up to” 7 million UK homes (starting with 5m by 2026) in areas NOT served by Virgin Media’s own network of 16m+ premises (Telefonica and Liberty Global also own Virgin Media and O2 in the UK).
The CEO of Liberty Global, Mike Fries, later made clear that this was partly due to their JV partner, Telefonica (inc. political pressure from the government of Spain, which has a say in the Spanish company), which had announced a strategic review of the business due to its heavy debts (c.£23bn) and other issues.
Fries also spoke of the need to “retain capital discipline in an increasingly irrational altnet environment“ (i.e. avoiding too much overbuild of other networks), while hinting that nexfibre might still be able to boost its network expansion through consolidation (M&A).
In addition, both Telefonica and Liberty Global now also have the right to kick off an initial public offering (IPO) for VMO2 after a lock-up period under the terms of the £31bn merger expired last year. But this is tricky, as neither side will want to take on the full burden of all those debts. The terms also allow each partner to sell its stake to a third-party 5-years after the closing, but the other shareholder still has a right of first refusal.
However, according to Bloomberg’s new report, a proposed deal is being “drawn up” that would allow Telefonica SA to take control of the UK Joint Venture. The article appears to indicate that they’re talking about VMO2, although it’s unclear where this would leave nexfibre, and we suspect it may be better to think of this as just being one of several potential options. But officially, there’s nothing solid on the table, yet.
Emilio Gayo, Telefonica’s COO, said today:
“We’re very happy with the current situation. The joint venture is working very well, we don’t have any proposals on the table to change that situation at the moment. Both companies, Liberty and Telefonica, are trying to find the best ways to develop the business.”
Strategic reviews of major businesses like this can often take a few months to run their course, thus we probably won’t get a better idea of the direction that VMO2 and nexfibre will be taking post-2025 until toward the end of summer or later this year. The outcome could produce a significant change in ownership and strategy toward the UK, but it might equally continue or even accelerate the current approach.
In the meantime, there seems to be somewhat of a spanner stuck (partially) in the works, which is slowing but not completely choking build progress. This is partly because Liberty Global itself remain committed to the UK, even while Telefonica seems uncertain. But it’s also due to the fact that you can’t stop such a major build engine without doing significant damage and removing options for the future (i.e. better to maintain it, albeit at a reduced pace, until the future is more certain).
The news does at least give alternative networks, as well as Openreach (BT), a bit less pressure to worry about. At least over the short term, or potentially longer if the outcome causes more disruption for VMO2 and nexfibre’s original ambitions. Time will tell.