Virgin Media O2 submits bid for UK rival TalkTalk

Virgin Media O2 has made a bid for smaller rival TalkTalk, as UK telecoms groups seek to bulk up in a highly competitive and fragmented market, according to people familiar with the matter.

The bid from Virgin Media, which is owned by Telefónica and Liberty, for privately held TalkTalk values the group at about £3bn, according to Sky, which first reported the approach.

In early April, TalkTalk’s owners asked investment bank Lazard to review its options after several companies, including telecoms company Vodafone, approached the UK broadband company about potential deals, according to people briefed on the matter.

There are four key companies in the UK’s broadband market — BT, Sky, Virgin Media O2 and TalkTalk. A combination of Virgin Media O2, which has roughly 20 per cent market share, and TalkTalk, which has 14 per cent, would be likely to create the second-largest broadband provider.

Telecoms companies across Europe have been pushing for greater consolidation in their domestic markets, arguing that the array of companies supplying mobile and internet contracts has created excess competition, driven down prices and stifled investment. But regulators have long been resistant to these deals, fearful that they would lead to increased prices for consumers.

Virgin Media declined to comment. TalkTalk did not immediately respond to a request for comment.

“Virgin Media has been saying for a few years that it would be interested in a discount sub-brand so it makes sense,” said James Barford, an analyst at Enders Analysis. “Virgin Media could also over time shift TalkTalk over to its network, which would be very lucrative,” he added, noting that TalkTalk only bought internet services from wholesale providers such as BT’s Openreach.

BT’s share price fell more than 8 per cent before the close on Friday.

“I think that regulators will remain extremely sceptical of mobile-to-mobile mergers and fixed-to-fixed mergers,” said Barford.

Vodafone, the fifth-largest player in the broadband market, has looked at the possibility of doing a deal with TalkTalk multiple times in the past but has tripped up over questions around the value of the business, according to people with direct knowledge of the matter.

A formal bid from Virgin Media O2 could increase pressure on Vodafone’s chief executive Nick Read to put forward a counter-offer, which might be looked upon more favourably by regulators.

TalkTalk was taken private just 19 months ago by Toscafund, a hedge fund run by Martin Hughes, for 97p per share, valuing the company at £2bn, including debt.

TalkTalk’s latest annual report showed that its customer base had shrunk from 4.3mn broadband customers in 2019 to 4mn in 2021. Revenue also declined from £1.6bn in 2019 to £1.4bn in 2021, though the company said this was because the 2021 financial year only included 11 months rather than the normal 12, and also because of the impact of Covid-19 restrictions. Net debt increased to £972mn, from £950mn in 2020.

Charles Dunstone, the company’s co-founder, became chair after Dido Harding stood down as chief executive in 2017 following a damaging cyber attack that hit tens of thousands of customers.

Dunstone backed the £1.1bn offer to take TalkTalk private, which was contingent upon him rolling over his stake into a new private vehicle that would own the company, allowing him to retain his 30 per cent holding.