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O2, the European subsidiary of Telefonica (TEF - Analyst Report), has signed a long-term backhaul deal with U.K.-based cable provider, Virgin Media Business. The deal will allow O2 customers across the U.K. to enjoy faster network speed.

In a ten-year deal, Virgin Media Business will connect O2’s base stations with its fibre network, via an Ethernet-based backhaul service. The high capacity Ethernet service will deliver 1Gbps data speed across cell sites and different parts of O2’s network.

Recently, Telefonica paid nearly $830.6 million (£550 million) to secure 4G spectrums in the 800 MHz band and plans to launch 4G mobile service later this year. Other than Telefonica, Everything Everywhere (EE), Hutchison Whampoa, BT Group Plc. (BT - Snapshot Report) and Vodafone Group Plc. (VOD - Analyst Report) have also acquired 4G spectrum in the U.K.

Over the last couple of years, Virgin Media Business, a subsidiary of Liberty Global Plc. (LBTYA - Analyst Report), has secured mobile backhaul deals from the four major mobile operators in the U.K. According to the company, the deal signifies the importance of backhaul network for supporting wireless services. Earlier this year, the company signed a $74 million (£49 million) deal with Sky U.K. to enhance its backhaul capacity.

In the last few years, there has been unprecedented adaptation of smartphones and tablets, which in turn has led to increased data demand. Higher proliferation of smartphones and tablets along with increased games and HD-movie downloads are pressurizing networks, resulting in slower network speed.

Last year, O2’s rival, EE, launched nationwide 4G service based on its 1800 MHz band and is planning to increase its 4G speed to 150 MB per second. O2 believes that tying up with Virgin Media Business will boost its network speed and ease data congestion, satisfying customers.

With the expansion of 4G services, the demand for data is expected to rise. The partnership with Virgin Media Business will strengthen O2’s position against EE. However, an indebted balance sheet of the parent company remains the primary concern for O2, which might force the company to delay the launch of its 4G service.

Currently, Telefonica carries a Zacks Rank #4 (Sell).

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