Virgin Media O2: Pricing pressure persists; consolidation remains a watchpoint

Research evidence excerpt

Virgin Media O2: Pricing pressure persists; consolidation remains a watchpoint

for Substantial (per the Financial Times). The

nexfibre/Virgin Media O2 investment plans, absent a Substantial transaction will also be

considered. The CMA highlighted countervailing factors which could prevent an SLC

finding, notwithstanding the theories of harm, which include rivalry enhancing merger

efficiencies and entry and expansion by third parties in response to a merger. On market

scope, the CMA explicitly keeps open whether competition is best assessed on

a national or sub-national basis. We believe this matters for the framing of the scale

narrative, with nexfibre CEO, Rajiv Datta, saying this "deal would create the scaled,

sustainable alternative to the BT Openreach monopoly, something the UK market still

lacks"; The envisioned nexfibre/Virgin Media O2 footprint would ultimately pass ~20m

UK premises with FTTH. The document suggests the “national challenger” argument

could be a relevant customer benefit, as infrastructure-level competition could enable

competitive retail prices. If an SLC is found, the CMA can consider remedies. We note

that the CMA was relatively constructive on mobile consolidation (Vodafone/Three was

approved, with only behavioral remedies); arguably the UK’s fixed access market is in

greater need of repair.

How is the Netomnia transaction structured? We discussed the transaction in some

detail in a recent note (see Virgin Media O2: Jam Tomorrow: Strategic NPV, leverage

still to prove out, for details). To quickly summarize, Netomnia (Substantial Group) is

the fourth largest FTTH network in the UK, the company passes about 3m homes and

reported ~350k subscribers as of February. Netomnia operates in urban areas, with all