Virgin Media O2 in talks over £3bn bid for Cityfibre

Virgin Media O2 (VMO2) is exploring a takeover bid for challenger broadband provider Cityfibre that could be worth up to £3bn.

Initial talks have taken place between Mike Fries, chief executive of Virgin Media O2 parent company Liberty Global, and Cityfibre boss Greg Mesch over a potential tie-up, The Telegraph has learnt.

Cityfibre is the largest of the so-called “alt net” broadband providers, reaching around 2 million homes with its full fibre broadband. It hopes to reach 8 million properties by 2025.

A swoop for the loss-making business would help Virgin Media O2 expand its network and meet its target of upgrading its entire network to full fibre. An estimated 50pc of Cityfibre’s network overlaps with Virgin Media O2’s.

Virgin Media O2, which is jointly owned by Liberty Global and Telefonica, is understood to be working with bankers at US-based LionTree to explore potential deals for a number of other smaller alt nets.

It comes amid growing pressure on broadband firms, as inflation makes the cost of expanding their networks more expensive.

Faster-than-expected rollout of BT’s Openreach network is also making it harder to compete.

One source said Cityfibre, which is backed by Goldman Sachs, could command a price tag of more than £3bn.

Cityfibre raised £4.9bn in debt financing last summer and has established a strong position in the market, providing services to telecoms providers including Vodafone and TalkTalk.

However, the company last month announced plans to cut up to 400 jobs – or a fifth of its workforce – in a bid to cut costs. It lost almost £50m in 2021.

James Barford, head of telecoms research at Enders Analysis, said Cityfibre’s scale made it attractive to VMO2 as any integration costs would be spread over a larger base.

But he warned any tie-up would face scrutiny from competition regulators due to “significant overlap” between the two companies’ networks.

A person close to the discussions said any transaction could take place through Liberty, which is chaired by “cable cowboy” John Malone, its full-fibre joint venture Nexfibre or a new separate entity, as well as VMO2.

They added that a transaction could include debt, but that Liberty had a cash pile of $3.5bn (£2.9bn) that it was ready to use.

Earlier this year, Liberty chief Mr Fries said the company would pursue an “opportunistic” policy towards potential acquisitions.

However, John Karidis, a telecoms analyst at Numis, said VMO2 was negotiating from a “position of weakness”.

He pointed to the fact that much of VMO2’s existing broadband network is cable, rather than full-fibre, as well as an almost 25pc decline in Liberty’s share price over the last year.

Cityfibre and other alt nets fear they are under threat from planned wholesale price cuts by Openreach, which they say will undercut them by locking customers into longer deals.

On Friday, Ofcom said it was extending its investigation into the price plan – dubbed Equinox II – following a backlash over comments made by BT chief executive Philip Jansen. Telegraph