O2 and Virgin Media in talks to merge

Mobile operator O2 may be set to merge with broadband giant Virgin Media to create one of the country's largest entertainment and telecoms firms.

A tie-up between two big players in Britain's telecoms and media sector would create a major rival to BT.

Spanish firm Telefonica, which owns O2, confirmed that it was in talks with Virgin-owner Liberty Global.

The company stressed that the negotiations were ongoing and there was no guarantee they would reach a deal.

"The process initiated by both parties is in a negotiation phase, not being able to guarantee, to this date, neither the precise terms nor the probability of its success," Telefonica said.

Virgin Media declined to comment.

O2, which provides the network for Tesco Mobile, Giffgaff and Sky Mobile, is the UK's largest phone company with around 34 million users.

Virgin has about six million broadband and cable TV customers and another three million mobile users.

A tie-up between the two would increase pressure on BT, which owns the UK's second-largest mobile network EE.

BT has 28 million mobile, TV and broadband customers across the country. It also provides services to a million businesses.

Telefonica tried to sell O2 to the owner of Three, CK Hutchison, for £10.3bn in 2015. However, that deal was blocked by the European Commission over concerns that it would have left just three major mobile phone operators in the UK.

But telecoms analyst Paolo Pescatore, who works for PP Foresight, does not think a deal between O2 and Virgin would face similar hurdles.

He said Virgin Media mainly provided services through cable, such as broadband and TV, whereas O2 focuses on mobile.

"It's very much complementary," he said.

Describing what a tie-up between the two companies could look like, Mr Pescatore said: "If you're an O2 customer, you'll be able to buy more than just mobile.

"If you're a Virgin Media customer, the vision - ultimately - will be that you can buy everything in one place with one bill, which isn't the case today."

But fellow telecoms analyst Kester Mann, who works at CCS Insight, said customers may need a "new mind-set" if packages for mobile, TV and broadband are to gain popularity.

"The UK has been a very slow market compared to others in Europe to transition towards this idea of packaged and bundled services," he said. "Customers haven't been demanding these types or services."

However, companies like them. "If they can lock customers in to fixed line and mobile then obviously it's that much harder to extract yourself from," Mr Mann said.