Yahoo Finance Virgin Media O2’s Spanish owner slashes value of stake by £1.5bn
Telefonica has written down the value of its stake in Virgin Media O2 by €1.8bn (£1.5bn) as the telecoms company grapples with soaring debt costs.
The Spanish mobile giant said it had booked a €1.8bn goodwill impairment in its 50pc stake in VMO2, blaming rising interest rates and “broader macroeconomic conditions in the UK”.
VMO2 was valued at £31bn when it was created following the merger of Virgin Media and O2 in 2021 by parent companies Telefonica and Liberty Global. The deal left VMO2 with debts of £20bn at the time, though borrowings have since reduced to £16bn.
The company’s valuation has come under pressure after the recent rise in interest rates pushed up the cost of borrowing for the heavily indebted telecoms business.
VMO2 swung to a £3.6bn loss in 2023, largely because of higher debt servicing costs. The interest rate charged on the majority of its debts are linked to benchmarks, meaning they move in line with movements in the base rate.
Karen Egan, head of mobile at Enders Analysis, described the telecoms group as “highly levered”.
She added: “In a world of low rates it made absolute sense to lever everything up as much as you could get away with. With rates now rising, the tolerance for that level of leverage is lower.”
Telefonica said it expected the economic downturn to impact future cash flow. VMO2, which has 45 million customers across broadband, TV and mobile, has forecast free cash flow of around £500m in 2024.
High debt costs are adding to challenges at VMO2, amid tough competition in a crowded telecoms market.
Rivals Vodafone and Three have agreed to merge in a £15bn deal that will create the UK’s largest mobile network with 27 million customers.
The tie-up is facing scrutiny on both competition and national security grounds. Both VMO2 and BT-owned EE are expected to demand concessions from regulators on issues such as mobile spectrum.
While analysts played down concerns about VMO2’s debt levels under private ownership, the issue is likely to complicate any potential stock market listing for the business.
Under the terms of the merger, both Telefonica and Liberty Global have the right to initiate an initial public offering for VMO2 three years after the deal closed. That deadline is approaching in June.
Mike Fries, chief executive of Liberty Global, has previously said he is open to selling off the stake in VMO2. However, an IPO is not thought to be likely under current market conditions.
Telefonica’s long-term plans for its stake in VMO2 are unclear. However, the Spanish firm has made two previous unsuccessful efforts to offload O2.
A £10bn deal to merge O2 with Three was blocked by competition regulators in 2016, while a planned stock market float was abandoned in the aftermath of Brexit.
VMO2 last week reported a 2.3pc decrease in consumer fixed revenues in 2023 as households cut back spending on TV and landlines during the cost of living crisis.
Mobile revenues edged up 0.6pc, held back by lower spending on handsets as consumers held onto their phones for longer. Overall revenues rose 5.2pc to £10.9bn.
The company said it expects revenues to be “stable to declining” in 2024, while profits are expected to fall by mid-single digits.
A Virgin Media O2 spokesman said: “As required, we assess the value of our business on an annual basis.
“This accounting adjustment has resulted in a non-cash impairment which has occurred due to the wider economic climate, with the higher interest rate environment causing a slight increase in our cost of capital.
“The impairment has no material impact on the underlying health of our business, which saw customer growth, strong cash flows and earnings rise last year.”
VMO2 last week announced plans to set up a new infrastructure business that will offer wholesale access to its broadband network.
The move is aimed at challenging the dominance of BT’s Openreach network as the company circles struggling “alt-net” broadband providers.
