Pdeclare to be informed that the Virgin Media merger proposal and O2, now officially under discussion, will "reshape" the UK industry. In practice, it will probably do the opposite. It is much more likely that a combination of the largest cable owner and the largest mobile operator will cement market shares. Regulators must be on high alert.
Both parent companies – Liberty Global in the case of Virgin and Spanish group Telefónica with O2 – seems to be motivated mainly by the chance to extract some cost savings. Making life hell for BT may be on your priority list.
John Malone, founder and driving force of Liberty, 79, is an opportunistic negotiator who has seen that fixed and mobile assets are converging at the age of 5G. He wants a UK mobile partner, which means O2 or Vodafone.
In the case of Telefónica laden with debt, its plan A – a £ 10 billion O2 sale to CK Hutchison of Hong Kong, owner of Three – was blocked by regulators in 2016. An agreement with Liberty is your next best option. Telefónica manages to extract a few billion pounds in cash in equalization payments to make the new venture a 50-50 company. But its UK assets also become less risky in the new converging world.
Analysts believe Virgin / O2 can save $ 500 million a year in combination, but does not expect that much (if any) of that amount will be redeployed in price cuts for consumers. Instead, we will be informed that savings are needed to finance the next round of investments in broadband and 5G infrastructure.
To some extent, this argument has merit – massive spending on new kits is needed – but it would be nice if competition authorities remembered to extract some initial benefits for consumers. Opportunities do not arise often.
Unfortunately, the regulator's hand is weak. BT's purchase of EE was approved in 2016, with no competition drugs, which paved the way for the imitation deal now on display. Perhaps a merger involving Virgin Media it was inevitable, as investment bankers have said for centuries, but the logic seems hopelessly defensive.
NMC Health post-mortem audit inevitable
To no surprise, the Financial Reporting Council will investigate EY's NMC Health 2018 audit. Less than a year ago, this Abu Dhabi-based private hospital operator was a £ 4 billion FTSE 100 company. Now, it's in the administration and its directors at the end said that (or rather, the investigator) had dug up $ 4 billion in undisclosed debt. So, yes, a post-mortem audit was inevitable.
But the broader issues are also important. NMC was an excellent example of the London financial market love affair with foreign companies with little connection to the United Kingdom. This open door approach to listing in the UK is great for bankers, developers and stock exchanges, but who is checking the quality of arrivals?
After past misfortunes in the mining sector – think Bumi, from Indonesia, and ENRC from Kazakhstan -, the governance rules were supposedly enforced to protect minority investors in companies with controlling shareholders. Now there is NMC, which was also dominated by some large investors and could also be proud of the usual team of top consultants (Barclays, JP Morgan Cazenove and HSBC in your case).
The Financial Conduct Authority's investigation at NMC is therefore just as important as the FRC's investigation at EY. In fact, the self-examination process would be better off if someone took the trouble to verify the FCA's own contribution to London's love of listings abroad. Has the latest set of governance reforms been agreed?
State support for airlines being distributed irrationally
Congratulations to Norwegian Air, which has avoided bankruptcy exterminating (more or less) their owners and convincing their bondholders and owners of their plans to become shareholders. The gigantic exchange of debt for equity was the price to be paid to secure a government bailout and the administration reached a deal on Monday, which was not a given.
However, the Norwegian's survival also illustrates the truth of the complaints of Willie Walsh of IAG and Michael O'Leary of Ryanair – huge economically irrational state support is being given to airlines that were in poor condition before the coronavirus . The airline market is also full of distortions, of course – but never more than now.