Carphone Warehouse Scoops Tiscali Bargain to Become U.K. Broadband Number Two

Carphone Warehouse has announced it has acquired Tiscali's U.K. business for £236 million (US$359.6 million), in a deal that will see Carphone jump to second-place broadband provider in the United Kingdom, behind BT. The U.K. retail group, which operates fixed-line broadband provider TalkTalk, could now also take the top spot as the country's biggest residential broadband provider, knocking Virgin Media into third place and overtaking BT, whose broadband subscribers feature a significant number of business and wholesale customers. Former incumbent BT currently boasts some 4.7 million customers including business clients, while Carphone will reach 4.25 million, with the addition of Tiscali's 1.45 million customers, representing more than 25% of the market, with Virgin Media holding some 4.0 million subscribers.

Tiscali has announced it will use the cash to restructure debts of more than 600 million euro (US$818.4 million), easing the pressure on the Italian operator, which has been forced to suspend payments on its long-term debts in 2009.

Carphone Warehouse has announced it will finance the acquisition, which comes without debt, from existing facilities. The operator says it currently has no plans to rebrand its U.K. operations and will continue to offer services under the Tiscali and TalkTalk brands for the time being. Subject to approval, the deal is expected to complete by the end of June.

Outlook and Implications

• Carphone Scoops a Bargain: Carphone CEO Charles Dunstone said the group had some tough negotiations to get the price for Tiscali's U.K. interests down, but said: "We feel very pleased that in the end the world moved our way." The deal represents the culmination of more than a year of speculation, since Tiscali announced it was seeking a buyer for its U.K. operations in April 2008 (see United Kingdom: 7 April 2008: The Race to Buy Tiscali Begins). The value of the unit at the time was estimated at well over £500 million, but a year of debt problems at Tiscali, a crowded U.K. broadband market, and the global recession have all meant the Italian operator struggled to find a buyer. Carphone, BSkyB, Vodafone, and even Virgin were all touted as potential suitors at some point, but any talks seemed to stumble on price. This left Tiscali increasingly desperate as its debts mounted, and Carphone's final price is well under half of the value of the unit a year earlier and even significantly lower than the rumoured £250 million on the table last week (see United Kingdom: 8 May 2009: Carphone Warehouse Tables US$378-mil. Bid for Tiscali's U.K. Unit—Report). With U.K. broadband penetration currently estimated at around 65%, the market is showing early signs of stagnation, and the recession has meant competition is fierce. Former incumbent BT has lost significant market share to BSkyB's strong triple-play offering, with the News Corp company showing strong traction of late (see United Kingdom: 1 May 2009: BSkyB Q1 Revenues Up 12% as HD TV Subscriptions Soar), while Virgin's quad-play bundle has also held its own (see United Kingdom: 5 May 2009: Virgin Media Q1 Revenues Down, But Gains Customers and Cuts Churn). The acquisition has given Carphone a huge subscriber hike at a bargain price, and made it a force to be reckoned with in the highly competitive U.K. broadband market.
• Tiscali Heads Home to Lick its Wounds: The sale marks the end of Tiscali's ambitions to become a global broadband player, as the U.K. unit is its last overseas asset to be sold. In its heyday back in 2000, Tiscali had operations in 15 countries across Europe plus interests in South Africa, but nearly a decade of spiralling debt has left it with only its home Italian operations. Tiscali recently sparked investor concern over its financial viability, as auditors refused to sign off its full-year 2008 accounts (see Italy: 16 April 2009: Tiscali Auditors Refuse to Sign Off Accounts, Sparking Fresh Fears over Debt Burden), and the operator had placed a strict deadline on the Carphone talks, something which may have encouraged the low selling price. However, the sale gives Tiscali some breathing space to reorganise its finances and concentrate on its core operations in the emerging Italian broadband market.
• The Start of a Broadband Bargain Bonanza? Acquisition activity in the European broadband market has been quiet of late, as the global recession causes operators to rein in capital expenditure and concentrate on cash flow and entrenching established investments. Although the Tiscali divestment was far from a fire sale, the deal represents the first major broadband cut-price spin-off since the beginning of the global financial crisis in Europe. Prior to the sale, the last major broadband deal in Europe was Telecom Italia's sale of its French broadband unit, Alice, to France's Iliad in the third quarter of 2008, for which the Italian incumbent secured a fair price as it divested underperforming overseas assets to address its own debts. The company is now seeking to divest its German broadband interest Hansenet (see Germany: 22 April 2009: Telefónica, United Internet Make Unbinding Offers for Hansenet—Reports), which has attracted significant interest but is still likely to go for a low price. Broadband-only providers have shown mediocre growth across several European markets, as triple- and quad-play offers hold greater appeal for customers looking to rein in their own spending, and as several countries approach saturation, competition is becoming fierce. The global financial crisis means companies looking to sell face the double-whammy of plunging valuations and limited interest—meaning Tiscali will not be the last broadband operator forced to divest interests at a knock-down price.