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Virgin Media/O2 merger could reshape the UK telecoms industry by creating a new giant

The new entity would be a big rival for BT, meaning players such as Vodafone, Talktalk, Sky and Three would be up against two behemoths

BT Group PLC - Virgin Media/O2 merger could reshape the UK telecoms industry by creating a new giant

The Virgin Media/O2 merger announced earlier on Thursday is set to bring some headaches to other telecoms players if approved by the authorities.

The new entity could offer a full range of services in a so-called quad-play of broadband, mobile, entertainment and telephony to Virgin Media’s 6mln customers and O2’s 26mln direct mobile users – it also serves 34mln non-direct clients such as Tesco mobile.

READ: O2 and Virgin Media agree merger to pile pressure on BT

The new £31bn powerhouse would be a big rival for BT Group PLC (LON:BT.A), meaning players such as Vodafone PLC (LON:VOD), Talktalk Telecom Group PLC (LON:TALK), Sky and Three would be up against two behemoths.

For BT, it’s been a tough market since the acquisition of EE in 2016, which allowed it to offer quad-play services.

The Openreach division is expected to benefit from the roll-out of fast broadband across the country, however there has been pressure to dismantle the monopoly: some think industry regulator Ofcom may finally pull the trigger.

“The requirement for more internet connections at ever-increasing speeds is a given for the UK consumer, but this also comes with expectations of lower prices,” said Richard Hunter, head of markets at interactive investor.

BT and Sky both cut prices earlier this year after Ofcom pressured the industry to improve “customer fairness” with new rules to encourage customers to switch between mobile and broadband contracts, removing the “loyalty penalty” where ongoing customers miss out on many of the cheapest deals.

UBS at the time said changes in prices were “likely to dampen hopes that the competitive environment in UK broadband is easing”, which may go through the roof with the potential quad-play services offered by Virgin Media and O2.

READ: BT cancels dividend for two years to fund investment and coronavirus consequences

Meanwhile, Vodafone is likely to cancel plans if the merger is approved by the Competition and Markets Authority (CMA).

The FTSE 100-listed firm, which has 19.5mln customers in the UK, signed a deal with Liberty Global PLC (NASDAQ:LBTYA) to host all Virgin Media's customers on its network from the end of 2021.

It may end up being scuppered, with Virgin Media potentially moving to O2's network.

According to Credit Suisse, it would also create uncertainty on mobile infrastructure services firm CTIL, a joint venture between O2 and Vodafone.

Unfortunately for Vodafone, analysts reckon the CMA is to approve the deal without too many hurdles.

"The transaction would resolve both companies' long-term strategies for fixed-mobile convergence and provide an increased customer base for Virgin Media to cross-sell its broadband and TV services, potentially ahead of a push by Virgin Media into fixed retail and infrastructure deployment in the 50% of the UK which is not covered by Virgin Media's network today," Deutsche Bank said.

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