TalkTalk broadband deal hopes dashed
SIR CHARLES DUNSTONE’S hopes of a lucrative sale of the broadband provider TalkTalk to Virgin Media O2 have been dashed, after market and regulatory uncertainties forced a rethink.
The billionaire entrepreneur has been in months of discussions with its bigger rival about a deal.
However, the two sides are now shifting focus with debt markets effectively closed by economic turmoil and no clarity over how the leaderless Competition and Markets Authority would view a combination of broadband rivals.
TalkTalk is now in talks with BT’s infrastructure arm Openreach about a deal to move its four million customers on to its new faster and more reliable fullfibre network in the coming years.
An agreement would undermine the main attraction of a takeover for Virgin Media O2, which would have made savings by transferring TalkTalk’s customers on to its own cable network. Strategic discussions between TalkTalk and Virgin Media O2 continue, however. They include the possibility that some TalkTalk customers could be moved to the Virgin Media O2 network under a wholesale agreement.
TalkTalk has been slow to make the shift to full fibre, relative to its major rivals, in part because it offers resellers lower profit margins than older broadband technology, to encourage investment in infrastructure.
Its finances are already under heavy pressure from a £1.1bn debt burden that has prompted lenders to impose stricter covenants and its auditor to issue a warning about its accounting. Sir Charles spun the business off from Carphone Warehouse in 2010 and took it private last year alongside Toscafund.
It was claimed that a sale of TalkTalk could attract bids of as much as £3bn including debt, although the figure drew scepticism from City analysts familiar with the company’s finances. Any breach of lending covenants could require Sir Charles and Toscafund to inject more equity to stabilise its balance sheet.
A full-fibre deal with BT would raise questions over TalkTalk’s existing relationship with Cityfibre, an infrastructure challenger backed by Goldman Sachs and Abu Dhabi’s sovereign wealth fund. It is investing heavily in building new networks but will require large scale broadband retailers to sign up homes and businesses to become sustainable. Cityfibre has previously alleged that the terms offered by Openreach to secure resellers are anti-competitive, although a High Court claim failed on a technicality.
Openreach is also seeking a major fullfibre commitment from Sky as part of industry-wide discussions codenamed Equinox 2. An agreement would remove the threat to BT that Sky might move millions of broadband customers on to Virgin Media O2’s network. TalkTalk, BT and Virgin Media O2 declined to comment.