The Daily Telegraph
Talktalk weighed down by debt as Dunstone seeks sale
THE broadband provider Talktalk has been warned by its auditor that presenting its accounts on a going concern basis is increasingly risky as it comes under pressure from its £1.1bn debt pile.
In the company’s annual report, which has not been published on its website or filed with Companies House but has been made available on request to bond investors and seen by The Daily Telegraph, auditors from Deloitte highlight a series of unusual accounting practices. They conclude that in a reasonable worst-case scenario, Talktalk would only be able to meet the covenants on its debt by excluding more “exceptional items” from costs such as acquiring and retaining customers.
Lenders typically restrict corporate borrowers’ debt to a multiple of their underlying profitability, so reclassifying more costs as exceptional can keep them within the limits. Breaching these covenants can lead to insolvency procedures. The rules around Talktalk’s debts become more restrictive next year, the auditors said.
Highlighting an increased level of risk to Talktalk’s status as a going concern they added: “We have identified a key audit matter related to going concern as a result of the judgments required to conclude there is not a material uncertainty related to going concern.”
Deloitte said there was a “high level of estimation” in how revenues were recognised, and “a high level of management judgment” in the decision to account for the £31m costs of switching customers from copper to fibre broadband as exceptional. The auditors concluded it was within accounting rules.
Talktalk, Britain’s fourth-largest broadband provider with four million customers, is controlled by the investment fund Toscafund following a buyout that ended its run as a public company last year. Its chairman Sir Charles Dunstone, also founder of Carphone Warehouse, retains a significant stake.
Sir Charles is now in talks to sell the business to the cable operator Virgin Media O2 and is reportedly seeking as much as £3bn including debt. Talktalk’s statutory loss before tax in the year to February widened to £28m from £11m. Talktalk did not offer any further comment on its annual report.