Reports suggest that Virgin Media O2 (VMO2) has entered talks to purchase CItyFibre, the UK’s largest altnet, in a deal that could be valued at over £3 billion

This weekend, a report from The Telegraph suggests that VMO2 could be interested in purchasing its fibre rival, CityFibre.

According to the report, Mike Fries, CEO of VMO2’s parent company Liberty Global, and Greg Mesch, CEO of CityFibre, have entered into “initial talks” over the possibility of VMO2 presenting CityFIbre with a roughly £3 billion takeover bid.

If such a deal were to take place, it would represent a major dynamic shift for the UK broadband market, seeing the country’s largest altnet and third-largest fixed network operator absorbed into the UK’s second-place broadband player.

VMO2’s broadband networks currently covers over 16 million premises. However, only around 1.7 million of these premises are passed with fibre-to-the-premises (FTTP), with the rest (roughly 14.3 million) using hybrid fibre coax (HFC) technology.

It is worth noting here that VMO2 finished upgrading its HFC network to DOCSIS 3.1 technology at the end of 2021, hence all of its existing customers now have access to gigabit-capable broadband speeds. Since then, the company has focussed on further upgrading its HFC network to FTTP, aiming to transition the entirety of its broadband footprint to full fibre by 2028.

CityFibre, meanwhile, is a purely wholesale full fibre player, having passed roughly 2.5 million premises FTTP, according to its most recent figures. The operator is currently aiming to cover 8 million premises by 2025.

Thus, for VMO2, the acquisition of CityFibre could be seen as a relatively quick way for the conveerged operator to race towards its ambitious fibre target of passing 23 million premises with FTTP by the end of 2026.

In practice, however, VMO2 and CityFibre’s networks overlap considerably. According to The Telegraph, the two companies’ footprints overlap by around 50%, but some digging by suggests that this could be “as high as 70%”.

Given this much network redundancy and CityFibre’s expensive price tag, it seems unlikely that VMO2 would be interested in acquiring the company directly.

However, a merger between CityFibre and NexFibre ­– the wholesale fibre joint venture (JV) launched by Liberty Global, Telefonica, and InfraVia Capital last summer – could be much more appealing.

Backed by an investment of £4.5 billion, NexFibre aims to cover 7 million UK premises outside of VMO2’s existing broadband footprint with FTTP. The company will offer services on a neutral wholesale basis to the nation’s ISPs, with VMO2 as an anchor tenant.

For Liberty, the acquisition of CityFibre by NexFibre could serve a dual purpose, not only giving the their JV a headstart when it comes to rollout numbers but also taking one of VMO2’s leading competitors out of the market.

As such, it should come as no surprise that any deal via either VMO2 or NexFibre would face intense regulatory scrutiny, with the Competition and Markets Authority having to carefully estimate the state of the UK broadband market if it were to lose CityFibre as a competitor.

In related news, VMO2 has recently been linked to discussions over acquiring Trooli, another of the UK’s altnets.

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