 Bloomberg -- The prospect of Britains biggest telecommunications deal in five years is threatening Vodafone Group Plc in its backyard, prompting speculation it could counterattack. A tie-up between Virgin Media and O2, the U.K. broadband and mobile units of Liberty Global Plc and Telefonica SA, could be announced as soon as this week, according to people familiar with the matter. That leaves Vodafone -- viewed previously as a strong alternative partner for Virgin Media -- looking isolated. Virgin Media is the only serious challenger to former monopoly BT Group Plc in fixed-line infrastructure. So a Virgin deal would be Vodafones sole opportunity to seize a place in the landline market and offer customers more lucrative bundles of mobile, broadband and TV at a national scale. Vodafone has already extolled the benefits of being a converged fixed-and-wireless operator in its other markets such as Germany. The Vodafone management team will have some difficult decisions to make in short order, said HSBC analysts led by Adam Fox-Rumley in a note. Vodafone and Liberty also have a history of close deal-making. The U.K.-based global wireless operator bought Libertys German and eastern European operations for 18.4 billion euros 19.9 billion last year. The two have a Dutch joint venture, VodafoneZiggo, that looks almost like a template for the emerging terms of Libertys U.K. deal.Liberty also jumped to Vodafones wireless network from BTs to resell its own-brand U.K. mobile services in November.The risk to Vodafone from a Virgin-O2 deal looks so great that some observers are speculating the Liberty-O2 talks are a tactic by Libertys deal-savvy Chief Executive Officer Mike Fries to sweeten the terms of the Vodafone deal he may really want.This story that Virgin Media is in discussions with O2 UK could still just be a ploy to try to flush out a deal with Vodafone and to set up a Dutch auction, said New Street Research analyst James Ratzer. In any deal with O2 UK, Vodafone would be the big potential loser here.Vodafone declined to comment.Regulator RiskVirgins cable and fiber connections reach about half of Britains homes, making it by far the biggest fixed-connection rival to BT, some way ahead of a flurry of fiber businesses such as CityFibre Ltd. that are vying to become a serious third-placed contender.All the more reason for Telefonica Chairman Jose Maria Alvarez-Pallete to make sure a Liberty deal doesnt slip through his fingers. British and European regulators united to block his last attempt to sell O2 to CK Hutchison Holdings Ltd.s unit Three in 2016, weeks before the U.K. voted to leave the EU.This had a chilling effect on telecom industry consolidation across Europe as regulators took a dim view of linking up networks at the risk of increasing prices.A deal allowing Virgin Media and O2 to leapfrog BT to become the biggest U.K. telecom operator stands a better chance of being approved by regulators, if past interventions are anything to go by.A potential Virgin-O2 tie-up wouldnt reduce the number of competitors in the U.K. mobile market from four to three. Neither did BTs 12.5 billion-pound acquisition of wireless unit EE, which was waved through by antitrust officials.Whats more, the coronavirus pandemic is forcing millions of people to rely more on telecommunications, strengthening the argument for allowing suppliers to merge so they can invest more in networks. U.K. or EU?While company revenues would usually require a deal review by the European Unions merger watchdog, even during the Brexit transition period, the U.K.s Competition and Markets Authority could ask to take over a probe. Germany has repeatedly failed to win back telecom reviews but Britains imminent departure from the bloc may make it hard for the EU to refuse.That would also set up a test for Melanie Dawes, the new chief executive officer of British communications watchdog Ofcom, who started in the role in March and is yet to have such a big deal pass her desk.Legal issues could still complicate a deal as Telefonica has set up a challenge to the U.K.s pending 5G spectrum auction. That could create uncertainty about O2s value as its unclear how much money Telefonica will have to pay for 5G airwaves and what it would own. Telefonica had previously planned an initial public offering for O2, which it said couldnt happen until after Britains previous spectrum auction.Another potential point of conflict is Virgin Medias agreement to shift its virtual mobile service to Vodafones network next year.New Street analyst Ratzer said theres probably a break fee for Virgin to exit the deal with Vodafone, but it shouldnt prove a stumbling block.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.2020 Bloomberg L.P. 