The companies are looking to form a stronger “mobile competitor” with the new UK joint venture, which will be split evenly between them. Combined revenue will be about £11 billion ($13.6 billion), while the deal values O2 at £12.7 billion ($15.7 billion) and Virgin Media at £18.7 billion ($23.1 billion).
Virgin Media, part of American billionaire John Malone’s media empire, has 3.3 million mobile subscribers in the United Kingdom, plus 6 million cable service customers.
The deal “creates a new telecoms powerhouse to compete with BT,” Jasper Lawler, head of research at London Capital Group, said in a note to clients Thursday.
The company’s shares slumped more than 9% in London, while Telefonica shares rose slightly in Madrid.
By teaming up, Virgin Media and O2 will be able to cut costs, with annual “synergies” expected to hit £540 million ($667 million) five years after the deal closes, they said. Virgin Media’s business in Ireland is not included in the deal.
The merger is expected to close in the middle of next year after gaining clearance from regulators.
That investment will include £10 billion ($12.3 billion) over the next five years, the companies added.
The merger is good news for broadband users in the UK, according to analysts.
“Heightened competition would foster investment in a country in need of better and broader fixed broadband access, while possibly curbing BT’s dominant position, too,” Dexter Thillien and Michela Landoni of Fitch Solutions wrote in a report.