Recovery Analysis: VMED O2’s Sum-of-the-Parts Supports Secured Recoveries Despite Fixed Pressure; VFN, SUN Recoveries Remain Highly Case Dependent

Editor’s Note: This analysis has been updated to include the first waterfall table across low, base, and high case scenarios, inadvertently omitted prior to publication.

Credit Research: Rafi Rees
Legal Analysis: Lucrezia Sperzani

Relevant Items:
VMED Model
LME Risk in Brief
Vendor Financing Analysis

Virgin Media, or VMED O2’s £16.9 billion senior secured debt, in our view, remains well protected even under conservative operating and valuation assumptions.

After a previous selloff in its £22 billion capital structure, bond prices for the U.K. telecoms group’s unsecured notes have leveled and are currently trading in the low 60s and longer-dated secured notes are in the low 80s, according to IHS Markit.

The drivers behind the prior selloff include the fact the U.K. fixed broadband market has been heavily overbuilt. Almost half of premises covered by FTTP are passed by at least two full-fiber networks. This has led to increasing stress, especially among the altnets who are now slowing their fiber build plans and consolidation is occuring. Despite that, additional fiber is still being deployed and the duplicated networks will need customers to spread their costs across.

Roughly half of VMED O2’s footprint remains on hybrid fiber-coaxial, or HFC, which will need to be upgraded, while the fiber competition is pressuring customer numbers, pricing and ARPU.

The company’s leverage of 5.7x as of March-end remains high in a period where U.S. cable companies have seen multiples compress. The closest U.K. comparator in BT Group now trades at 5.3x, suggesting VMED O2’s value may already sit inside the debt stack. Organic deleveraging is likely to be slow, particularly if the shareholders continue to take distributions.

VMED O2 is also closely tied to Nexfibre, a fiber network joint venture owned by its shareholders Liberty Global and Telefonica, alongside InfraVia. Nexfibre is acquiring Substantial Group, the parent of rival fiber rollout business Netomnia.

Some investors view the Netomnia transaction and VMED O2’s continued investment in Nexfibre as shifting infrastructure value outside the range of creditor claims. These concerns together with the lack of an obvious operating catalyst before the £3.002 billion 2029 maturity wall have fuelled LME speculation, discussed here in our LME Risk in Brief, and left investors reluctant to step into the selloff.

Using relatively conservative operating and valuation assumptions, we find the £16.9 billion of senior secured debt is broadly covered across our base and high case scenarios, retaining a high recovery even in the downside. We also see no risk of a near-term liquidity event, especially should Nexfibre’s acquisition of Substantial Group close and the company receive about £950 million net cash consideration for committing wholesale traffic across 4.6 million premises.

VMED O2 generates positive levered free cash flow across all three illustrative scenarios and ended June with £1.6 billion of liquidity, including £1.1 billion of RCF headroom, with no material maturities before 2029.

Click HERE to see the full capital structure.

Key Takeaways:

• VMED O2’s senior secured debt appears well protected even under conservative assumptions. Applying a 5.5x multiple to our estimate of FY’29 pre-IFRS 16 EBITDA leaves senior secured debt at an 81% loan-to-value and the vendor financing notes, or VFNs, at 96%, supporting full recovery for both. Under our base case, the value breaks in the unsecureds, with about 30% recovery. With the longer-dated secured bonds trading in the low 80s, we think the selloff has created a more favorable risk/reward profile than elsewhere in the capital structure.
   
• Our sum-of-the-parts, or SOTP, analysis provides a similar ultimate valuation but slightly better recoveries for the SUNs. Valuing VMED O2’s fixed network, fixed customers, consumer mobile business, O2 Daisy interest and Cornerstone stake separately, based on current KPIs, produces about £21 billion of asset value in our base case. The secured debt and VFNs remain covered, while the SUNs are again impaired, recovering about 47%.
   
• The VFNs sit at the fulcrum in our more stressed scenario, and we believe their structural complexity warrants a discount. In our analysis, we consider them structurally junior to the conventional senior secured debt but structurally senior to the SUNs, subject to a number of assumptions including that the asset security release has not occurred. They are covered across our base cases, although value begins to break within the VFNs in our downside scenario.
   
• We do not believe VMED O2 requires a recovery in fixed broadband. We assume in our base case continued pressure on fixed customers and ARPU, offset by relatively resilient mobile revenue, the transfer of about 500,000 Substantial Group customers, cost savings and a more favorable revenue mix.
   
• Our base case assumes operational stagnation rather than a turnaround. Revenue falls from £10.1 billion in FY’25 to an estimated £9.75 billion in FY’26 as fixed customer and ARPU pressures continue, before gradually recovering to an estimated £10 billion by FY’29. Adjusted EBITDA follows a similar path, declining from £3.89 billion in 2025 to £3.74 billion in FY’26 before recovering to £3.84 billion by FY’29 as mobile resilience, the Substantial Group customer transfer, mix improvement and cost efficiencies offset much of the weakness fixed. In our low case, we see revenue and EBITDA in FY’29 falling to £8.94 billion and £3.32 billion, respectively, while in our high case FY’29 reaches £10.98 billion of revenue and £4.41 billion of EBITDA.

Pricing Down, Costs Out: Modelling VMED O2 Through the Fixed Decline

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Our forecasts do not rely on a recovery in VMED O2’s fixed business. Instead, our base case assumes that customer numbers and ARPU for the fixed business remain under pressure, while mobile resilience, the Substantial Group customer transfer, a more favorable revenue mix and cost efficiencies offset much of the resulting weakness. In our base scenario, adjusted EBITDA on a consolidated basis remains broadly flat at about £3.8 billion through FY’29, with cash generation improving as capital expenditure falls.

Fixed ARPU is the highest sensitivity operating assumption. It fell 4.6% year over year to £46.56 in the second quarter, reflecting competitive pricing, retention discounts and continued pressure on higher-value bundles. We believe its fiber upgrade program should improve network quality and reduce VMED O2’s technological disadvantage, but is unlikely to give a pricing kicker. Rather, the upgraded network is more likely to keep customer churn down as it can potentially compete with full-fiber alternatives.

While not a perfect comparison given differences in product mix, BT’s consumer ARPU in the low £40s provides a useful reference point for the potential direction of travel. The gap leaves room for VMED O2’s ARPU to decline further, with little reason to believe in near-term stabilization or a rebound in pricing, as we expect ARPU’s in the space to continue to converge at the lower number. In our base case scenario, we assume that fixed ARPU moves toward the mid-40s range before stabilizing. Our downside case takes it closer to BT’s current level, while the upside case allows for some improvement in pricing following a period of stabilization.

We take a similarly cautious view of fixed customer relationships. VMED O2 lost another 30,000 fixed customers during its second quarter. Net additions have been negative for the last six quarters albeit at a declining rate – in the first half of 2025, the business lost about 100,000 fixed customers on a net basis, while for the same period of 2026, the business lost 37,000 customers.

In our base case scenario, we assume that organic customer losses continue as fiber overbuild increases the number of alternatives available in VMED O2’s footprint, although at a lower rate than in recent history.

We believe those losses will moderate as altnet construction slows and consolidation removes some of the more aggressive competitors, although we do not assume a return to meaningful customer growth. Our fixed customer assumptions exclude the about 500,000 YouFibre and brsk customers expected to transfer to VMED O2 through the Substantial Group transaction, which are modelled as a separate cohort. We are modestly more positive on the performance of this customer cohort given its value-oriented position on pricing.

While we believe that slower fiber construction will eventually reduce the pace at which new competition enters local markets, it will not remove networks that have already been funded which will need to increase penetration on infrastructure, which should keep acquisition offers and retention pricing competitive. Our high case scenario assumes that VMED O2 broadly stabilizes its fixed base, while the downside case reflects a longer period of elevated customer losses.

Mobile provides VMED O2 the main source of its operating resilience. Mobile ARPU has been broadly stable, remaining slightly below comparable figures reported by BT, reducing the case for the same degree of downward convergence we assume in fixed. Our forecasts incorporate relatively stable increases in mobile pricing as most contracts have inbuilt contractual annual price increases which would provide support. At the same time, we assume a modest decline in retail connections, with wholesale growth providing some support. This cushions the deterioration in fixed, a trend we have seen over the last couple of years, however, in the vein of conservatism, we do not model mobile as a material growth engine.

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Another offset for the declining revenue base comes from the cost side of the equation. We assume gross margins will remain modestly above historical levels, largely because lower-margin revenue is declining faster than the core service businesses on the whole. Mobile handset revenue has fallen as customers retain devices for longer or purchase them directly from manufacturers, while construction management revenue from Nexfibre has reduced as the pace of network build has slowed. Both streams carry substantial associated costs, so while their decline reduces reported revenue, the proportional effect on gross profit is minimized. The offset to this however is the increase in wholesale network expenses from the Nexfibre relationship.

Operating costs are currently running above historical levels. Personnel expenses increased after the O2 Daisy transaction owing to salary increases and higher headcount, while VMED O2 continues to incur costs associated with integration and transformation programs. Our forecasts assume these pressures persist in the near term before operating costs return closer to their historical relationship with revenue as integration work concludes and management’s efficiency measures take effect.

With the Substantial Group transaction and wider Nexfibre relationship, VMED has decided instead of building out its network to pay for access for Nexfibre’s network, moving costs away from capex toward COGS. Management says the deal will allow them to reduce capital expenditure by a net present value of about £800 million as Nexfibre funds the construction and upgrade of the relevant fiber infrastructure. VMED O2 will instead pay recurring access fees as customers migrate onto the Nexfibre network. Our forecasts therefore reflect lower capital expenditure alongside modestly higher operating costs following completion of the transaction.

Taken together, our assumptions describe a period of operational stagnation at the group level. Adjusted EBITDA remains broadly flat through FY’29, while lower capital expenditure supports a gradual improvement in free cash flow leading to a modest deleveraging.

Valuation: Three Ways to Find Where Value Breaks

We approach valuing this business from a few different angles to home in on a reasonable valuation range. Each methodology captures a different feature of the business while carrying its own limitations.

Using both an EV/EBITDA and EV/EBITDA less capex exit multiple provides clear comparisons to listed telecom operators and cable businesses. The EV/EBITDA less capex approach gives consideration to the capex intensity of individual businesses and network composition, which we think is important given the level of capex necessitated by the VMED O2 businesses.

One caveat is the result is highly sensitive to whether current expenditure represents a recurring requirement or temporarily elevated growth and transformation spending, which we explore separately.

We sense check our valuation estimates using a sum-of-the-parts analysis, breaking the business into its various components and valuing them individually. We divide the business into its fixed network, fixed retail customers, consumer mobile business, O2 Daisy interest and Cornerstone stake using transaction precedents relevant to each asset. This avoids applying a single multiple across businesses with different growth, capital-intensity and infrastructure characteristics, although precedent transactions inevitably differ in geography, timing and asset quality.

The range of values arrived at across methodologies is shown below.

EV/EBITDA: Secureds Covered, SUNs Need the Upside

The broader European telecom peer group trades at a median of about 7.3x last 12-month EBITDA, although we view this as an aggressive reference multiple for VMED O2. Deutsche Telekom, Orange, Telefónica and Telia each benefit from greater geographic diversification, lower leverage or infrastructure portfolios that command higher valuations than does VMED O2. In our view, simply applying the peer median would give insufficient weight to VMED O2’s exposure to the deteriorating U.K. fixed market, its remaining cable footprint and the limited growth assumed in our forecasts.

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Therefore, we believe that BT provides the most relevant domestic benchmark. It currently trades at about 5.3x LTM EBITDA, including its pension deficit, while facing many of the same competitive pressures in U.K. fixed broadband as VMED O2. However, BT also owns Openreach, has a more advanced fibre footprint at roughly 73% FTTP coverage compared with VMED’s 48%, while simultaneously carrying materially less leverage.

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Applying a 5.5x multiple to our base-case FY’29 pre-IFRS 16 projected EBITDA for VMED O2 and discounting it back at an 8.1% WACC provides us with a distributable value of about £21 billion. This equates to an 81% loan-to-value ratio through the senior secured debt and 96% through the VFNs. Both layers are fully covered, but value breaks within the senior unsecured notes, which recover about 30%. The downside provides considerably less protection. At 5.3x EBITDA, senior secured loan-to-value reaches 100%.

Stronger operating performance in our upside scenario would lift enterprise value sufficiently to cover the entire debt stack. Loan-to-value falls to 69% through the secured debt, 82% through the VFNs and 87% through the senior unsecured notes, resulting in full recovery across all three classes.

Waterfall Treatment

Our recovery analysis applies the estimated enterprise value through the capital structure based on our reading of the debt documents to which VMED O2 is a party. The waterfall should be viewed as a simplified recovery framework, particularly given the complexity of the group structure, ranking the senior secured debt first (ignoring any potential asset security release as discussed further in our VFN article), followed by the total vendor financing liabilities next and senior unsecured notes recovering only thereafter and assumes recoveries will be determined by reference to the operating group as a whole rather than to a single entity in isolation. Our extended analysis on the vendor financing notes, or VFNs, HERE discusses in more detail the structure and the ranking of the VFNs compared with the rest of VMED O2 capital structure, along with the relevant assumptions.

The vendor financing liabilities partly comprise notes that are issued by third-party special purpose vehicles, or SPVs, outside the VMED O2 group, which use the proceeds primarily to purchase receivables owed by VMED O2 subsidiaries. Where note proceeds or cash at the VFN level exceed the receivables available for purchase, the excess is advanced to VMIH, an intermediate holdco, through separate financing facilities. VMED O2 describes these arrangements as amounts owed to non-consolidated SPVs that have financed the purchase of receivables due from certain operating subsidiaries.

However, VMED O2 provides limited disclosure of the relative ranking, security or guarantee arrangements attaching to the individual components that make up its aggregate vendor financing liabilities, whether the receivables held by the non-consolidated VFN issuers or the amounts owed under separate supplier financing programs. Absent that granularity there is no defensible basis on which to differentiate seniority across those obligations, so the total vendor financing is best modelled as a single pari passu claim carrying one blended recovery rate rather than attempting to tranche it.

Also, VMED O2 proportionately consolidates its share of its mobile-tower infrastructure JV Cornerstone’s assets and liabilities because Cornerstone is accounted for as a joint operation, with VMED holding a 25% stake. At FY’25, the disclosed Cornerstone debt comprised a £525 million term loan, £260 million of revolving facilities and a £14.3 million short-term loan, with VMED O2 recognizing its proportional share of those liabilities.

We include the £267.5 million term loan in the EBITDA multiple waterfalls because the associated Cornerstone earnings are included in consolidated EBITDA. In the SOTP, we exclude the debt because Cornerstone is valued using the equity value implied by the most recent stake transactions, which is then applied directly through the waterfall.

EBITDA Less Capex: Full Capex Still Leaves 73% for the SUNs

As mentioned above, the main limitation of EV/EBITDA is that it ignores the condition and capital intensity of the underlying network. A telecom operator with a largely completed fibre build receives the same valuation as one that must continue spending heavily to replace legacy cable, expand 5G capacity, remove obsolete equipment and upgrade customer hardware. This is particularly relevant for VMED O2 given that about half of its fixed footprint remains on cable and several major investment programs are still underway. Our EBITDA-less-capex analysis accounts for the expenditure required to sustain and modernize the network, providing a more demanding measure of the value available to creditors.

The peer multiples require careful interpretation because operators are at different stages of their investment cycles. The peer group trades at a median of about 14.x EBITDA less capex, while the 19x average is distorted by a single constituent, Telefónica.

BT’s current multiple of about 17x is also elevated by the fiber buildout at Openreach, which temporarily depresses the denominator. Applying the midpoint of BT’s £3.8 billion to £4.3 billion longer-term capex guidance reduces its multiple materially to approximately 11.6x.

We use an 11.5x multiple in our VMED O2 downside case, 11.75x in the base case and 12x in the high case. This range sits below the reported peer median and is broadly consistent with BT once its current fibre investment moderates. It also avoids giving VMED O2 the benefit of the much higher multiples implied by peers with lower capital requirements or greater geographic diversification.

Our calculation deducts the full amount of forecast capex as VMED O2 does not disclose what fraction of its expenditure relates to maintenance rather than growth and transformation. This is a demanding treatment given that current spending includes fiber conversion, mobile integration, Huawei equipment removal and IT transformation. Our forecast already has capex falling from current levels as these programs mature and as nexfibre funds a greater proportion of the relevant fiber infrastructure, with capex as a percent of revenue declining to 19%, down from 23% for the last 12 months.

There is a credible argument that VMED O2’s long-run investment requirement could fall further. The FY’25 impairment test assumes terminal capital intensity of 14.8% of revenue in year 10, once the current network programs have stepped down. This may provide some support for a normalized capital-intensity assumption of closer to 15% of revenue, however that is far beyond the forecasted period.

We would note our valuation using this metric is highly sensitive to this distinction. At an 11.75x multiple, every £100 million reduction in terminal capex adds about £1.18 billion to enterprise value. Applying a lower normalised-capex assumption could therefore move the SUNs from partial to full recovery and create meaningful equity value.

SOTP: £21B of Asset Value Leaves the SUNs With 47% Recovery

Fixed Network Is Largest Source of Value at £7.7B to £10.1B

We believe VMED O2’s fixed network is the largest source of value within the company. Using the implied network value per premise passed, derived from previous transactions, we arrive at a valuation range of £7.7 billion to £10.1 billion. Our low case is based on the pending Substantial Group transaction, after deducting the £150 million attributed to the retail customers. FTTH operator Bluevia provides the base reference, while a blended average of the three transactions outlined below provides the high case reference.

The main limitation in this analysis is the difference in network quality across the cohort. The precedent transactions largely involve full-fiber infrastructure, whereas about half of VMED O2’s owned footprint remains on HFC. We therefore apply a 12.5% discount to the unadjusted per-premise values across all three cases.

This assumes the FTTP portion is valued in line with the precedents and the HFC portion at 75% of an equivalent fibre premise, producing a blended value of 87.5%. The HFC discount reflects the remaining conversion expenditure, customer installation costs and weaker long-term operating and wholesale economics, while recognizing that the network already provides gigabit speeds and benefits from VMED O2’s extensive duct infrastructure.

Fixed Retail Likely Worth £1.65B to £3.3B With Potential Upside

We value VMED O2’s fixed retail business separately using the signed consideration for the approximately 500,000 YouFibre and brsk customers expected to transfer through the Substantial Group transaction. The £150 million consideration implies no more than £300 per customer because the transaction covers at least 500,000 relationships.

In our view, this is likely a conservative benchmark for customer value for VMED O2, as YouFibre and brsk customers are generally more value-oriented, price-led broadband customers, whereas VMED O2’s customer base should have better economics through higher ARPU, longer tenure and greater bundling.

We therefore apply the £300 value per customer in our low case, and estimate a base and high case of £450 and £600, respectively. Applying this figure to VMED O2’s existing 5.5 million fixed customer relationships produces a value of £1.65 billion to £3.3 billion across all three cases for the fixed retail business.

Consumer Mobile Could Be Worth as Much as £7.1B to £9.2B

Consumer mobile precedents include materially different packages of assets, so the headline value per connection is not directly comparable across transactions. The Verizon/TracFone acquisition provides the cleanest lower-bound reference for valuing customer relationships. TracFone was predominantly a mobile virtual network operator, or MVNO, with value concentrated in its prepaid customer base, brands and distribution platform rather than owned network infrastructure or spectrum. Its customer base was also more heavily weighted toward lower-ARPU, value-oriented prepaid subscribers than VMED O2’s.

T-Mobile’s acquisition of UScellular provides a higher-end reference, in our view. The acquired business was predominantly postpaid, but was concentrated in rural and underserved U.S. markets with the transaction also including retail operations and about 30% of UScellular’s spectrum. The headline value per connection therefore overstates the value attributable to the customer relationships alone, particularly given the spectrum acquired and the significant operating and capital expenditure synergies identified by T-Mobile.

The Virgin Media/O2 transaction is the most directly comparable precedent because it involved the same underlying O2 mobile business and broadly the same customer profile as VMED O2 today. However, the transaction encompassed the entire O2 operation, including the customer base, brand, spectrum, mobile network, wholesale activities and other infrastructure. Its implied value per direct retail connection therefore represents the value of the whole mobile business rather than the customer relationships in isolation.

We therefore apply a £350-£450 value per direct retail mobile connection, with £400 in the base case. This places VMED O2 at a substantial premium to TracFone, reflecting its much greater weighting toward higher-value contract customers, while applying a meaningful discount to the historical O2 transaction to remove the value attributable to spectrum, network infrastructure, wholesale operations and other assets captured elsewhere in the SOTP.

Applying this range of values per connection to VMED O2’s 20.4 million connections arrives at a value of £7.1 billion to £9.2 billion for the consumer mobile business.

O2 Daisy and Cornerstone Likely Another £1.5 Billion in Value

We value the remaining assets at VMED O2 using direct transaction evidence. VMED O2’s retained 70% interest in O2 Daisy is valued at £928 million based on the negotiated exchange ratio in the transaction. Its 25.01% beneficial interest in Cornerstone is valued at £534 million using the GLIL and Equitix minority stake sales.

We assign no separate value to wholesale, IoT, hardware or construction activities. Some of their economics are already captured in the network and customer valuations, while the available disclosure is insufficient to support credible standalone values. Including them separately would risk double counting, although the exclusion could leave some residual value unrecognised, potentially providing upside to our estimate.

Relative Value: Long Dated Secureds Offer the Strongest Upside

Within VMED O2’s capital structure, we think the way to express a constructive view is through the longer dated senior secured bonds which have sold off more and therefore offer a greater combination of price appreciation and carry given we believe the secureds are more or less covered even in a downside case. Investors more confident in the business trajectory may view the VFNs as a way to play the credit as well given they are covered across our valuation methodologies under the base case.

On that basis, the $850 million 7.75% senior secured notes due 2033 are among the cheapest secured bonds, trading at 82.5 according to IHS Markit. This is roughly three points below the $950 million 7.75% notes due 2032 despite carrying the same coupon and maturing only nine months later. This gives the 2033s greater price convexity if VMED O2’s credit improves, while the 7.75% coupon provides meaningful carry while investors wait for that repricing.

We believe there is a credible path to tighter trading levels if VMED O2 demonstrates that EBITDA can stabilize and begins making visible progress on its leverage. Potential catalysts include delivery of cost savings, stabilization in fixed customer losses and ARPU, lower capital expenditure and stronger free cash flow, completion of the Substantial Group transaction and clarity around the use of proceeds, and early progress refinancing the 2029 secured maturities. Illustratively, appreciation of the 2033s to 90 over a one-year holding period would produce a total return of about 19%, including coupon.

We are considerably less constructive on the senior unsecured notes from a recovery perspective. They are not consistently covered across our valuation methodologies and could be materially impaired under our base case. Our low case leaves the unsecureds with no recovery, while the high case supports full recovery. Their returns are therefore much more dependent on enterprise value holding up and on value remaining after the secured and intermediate claims have been satisfied. We would rather take exposure through the discounted secured bonds, where the recovery support is materially stronger while still retaining substantial upside if the credit rerates.

February Update Could Clarify the Deleveraging Path

Management acknowledged on its second-quarter FY’26 earnings call that leverage is above its 4x to 5x target and that credit spreads are elevated, adding that VMED O2 would remain opportunistic in the debt market as it addresses the 2029 maturities. However, it gave little detail on the available options and did not directly discuss repurchasing bonds at a discount. Management said the group was working through its business-planning process and would provide its usual annual update in February 2027.

Assuming the Netomnia transaction completes, that update should provide the first clearer indication of VMED O2’s intentions for the roughly £950 million of expected proceeds. Investors will be looking for FY’27 guidance, the planned reduction in capex, the scope for further cost savings, the treatment of shareholder distributions and a timeline for returning leverage toward the target range.