A major newspaper has reported that a parent of broadband ISP and mobile giant VMO2 (Virgin Media and O2) has held “initial talks” over the possibility of mounting a £3bn takeover bid for the UK’s third-largest alternative full fibre network (AltNet), CityFibre. But such a deal could face regulatory and competition concerns.
The Telegraph (paywall) actually clarifies in its second paragraph that the talks themselves are said to have taken place between Mike Fries, CEO of VMO2’s parent company Liberty Global, and the CEO of CityFibre, Greg Mesch. As such, this is more a proposal to merge the new Joint Venture company – Nexfibre, which is being backed by Telefónica, Liberty Global and InfraVia Capital Partners, with CityFibre.
Just to recap. VMO2’s broadband base currently covers 16.14 million UK premises and is a closed network (not open to wholesale), which mostly reflects their older Hybrid Fibre Coax (HFC) infrastructure (14.3m premises) and some Fibre-to-the-Premises (FTTP RFoG) lines. The operator is currently upgrading all of this to full XGS-PON powered FTTP by 2028 and may open it fully up to wholesale in the future.
By comparison, Nexfibre is being treated as a separate company, albeit one where VMO2 is the anchor tenant ISP. The company has committed £4.5bn and aspires to cover “up to” 7 million additional UK homes (here) – starting with 5 million by 2026 (i.e. those homes not currently served by VMO2). The new network will be open to wholesale access for other ISPs to harness. The official build for this has already begun (here).
As for CityFibre, the operator is currently the UK’s third-largest provider of open access full fibre infrastructure to consumers, after Openreach and VMO2. The FTTP network they’ve built covers around 2.5 million premises (2.2m Ready For Service) and they aim to cover up to 8 million premises (funded by c.£2.4bn in equity and c.£4.9bn debt) – across over 285 cities, towns and villages (c.30% of the UK) – by the end of 2025 (here).
Competition and Regulatory Obstacles
Suffice to say that any deal between Nexfibre and CityFibre would be likely to face fewer regulatory hurdles than one between VMO2 and CityFibre directly. But market regulators aren’t dumb and would probably still recognise the close proximity of players on the Liberty Global side in the UK, which could still raise wider competition and regulatory concerns. On the flip side, there are a lot of AltNets around and the competition regulator (CMA) may decide that a deal between CityFibre and Nexfibre would thus not be hugely disruptive.
Naturally, VMO2 would gain from such a deal by effectively removing or neutering a strategic competitor of scale in the full fibre space. Both VMO2 and CityFibre’s networks have a high degree of overlap in urban areas. The Telegraph suggests this could be around 50%, but Thinkbroadband estimates it may be around 60% – 70%. So it’s hard not to see this as being, primarily, a defensive move by VMO2’s parent. By comparison, VMO2’s recent interest in Trooli is much more logically about expanded coverage, due to only a very limited overlap (here).
At the same time, we do know that many AltNets feel as if they’re being placed under incredible strain, both from competition by rival networks of a similar scale and from Openreach’s massive FTTP deployment and related price cuts (here). A period of accelerated market consolidation is now widely expected as smaller players merge into bigger ones, although not all AltNets will be so lucky and some may fail.
In that sense, a tie-up between Nexfibre and Cityfibre would be a useful way of creating a stronger competitor for Openreach, particularly in the wholesale space, while placing the combined operator on a much more secure footing for the future. But whether regulators would buy that, given the close links to VMO2 via Liberty Global, is another matter entirely.
As a side note, it’s interesting to highlight how VMO2’s parent(s) have switched from last year’s allegedly shelved talks over a £3bn tie-up with TalkTalk (focused more on the retail level), to this year’s talk of a £3bn takeover of CityFibre (focused more on the infrastructure level). Both approaches seem likely to face tedious competition concerns, albeit for very different reasons.