Investors hit the sell button to start the week, and Virgin Media's debt took the biggest knock in the US high-yield market. According to Trace, its 5% dollar note slid by 8 cents, touching an intraday low of 42 cents. In Europe, Bloomberg data show the Vmed O2 UK Financing 2032 issue fell by 6 euro cents to 70.5 cents. That slide marked new record lows.
The pressure followed concerns raised Friday by the UK Competition and Markets Authority over a planned combination of joint venture Nexfibre Networks Ltd. with rival Netomnia Ltd. The regulator's stance signaled the deal could be blocked, unsettling a key plank in Virgin Media's strategy to grow revenue in a crowded market and reduce leverage.
Virgin Media is owned by Liberty Global Ltd. and Telefonica SA. Together, they hold two of the three ownership stakes in Nexfibre, and under the proposal Virgin Media would extend its reach using Netomnia's network. Per the Competition and Markets Authority's interim report, the transaction risked weakening competition across the UK's wholesale broadband network, potentially jeopardizing the first major consolidation in the fiber space.
On Friday, Erhan Gurses, a telecom analyst at Bloomberg Intelligence, said in a note that the watchdog's preliminary findings deal a heavy blow to Virgin Media's turnaround plan. He also said Virgin Media will need to increase spending to upgrade its own fiber network, with any savings on wholesale charges only partially mitigating the effect.
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"VMED is suffering from a combination of increased competition, general underperformance, poor free cashflow generation and high capex needs, all of which is hampering the company's ability to pay down debt," said London-based Ironshield Capital Management's senior credit analyst, Isharsimran Sawhney. "UK Altnets are generally facing brutal price and speed competition."
Adding to the uncertainty, BT Group said on Monday that it had bought TalkTalk Telecommunications, a step that could expand the number of customers served by one of Virgin Media's largest rivals. Sawhney, who does not hold any Virgin Media debt, said the development "shows you how weak the broadband market actually is in the UK, and adds some pressure to the VMED structure." He noted TalkTalk was bought "for pennies" by BT.
A representative for Virgin Media O2 did not respond to a request to comment.
As of the end of June, Virgin Media O2 said it had roughly £22.5 billion ($29 billion) in combined third-party borrowings and lease commitments. Despite the selloff, its nearest debt maturity is not until 2029. Virgin Media's turnaround plan counted on about £950 million of net cash from the consolidation deal, and it would also need to spend more on fiber upgrades, with savings on wholesale fees only partially cushioning the blow.
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