TalkTalk Telecom Group PLC is in discussions to form a joint venture that will support the rollout of fiber broadband across the U.K., as the company seeks to expand its footprint in Britain's broadband market.
TalkTalk has reached an agreement with Infracapital, the infrastructure equity investment arm of investment manager M&G Prudential, under which a new, independent entity is created that will be 80% funded by Infracapital, with TalkTalk providing the remaining 20%.
The new company will target mid-sized towns and cities across the country, bringing fiber broadband to more than 3 million premises. The venture is part of TalkTalk's "much simpler strategy" that will heavily rely on investments in customer growth, company CEO Tristia Harrison said during a Feb. 8 earnings call.
An equity investment of up to £500 million is needed for the joint venture, bringing total investments to about £1.5 billion over five to six years. TalkTalk agreed to a minimum volume commitment as a founding wholesale customer in the entity.
To support the fiber rollout, TalkTalk has announced the placing of new shares equivalent to 19.99% of its issued share capital at 0.1 pence each, in a bid to raise up to £200 million. TalkTalk Executive Chairman Charles Dunstone and other TalkTalk directors intend to buy at least £40 million of the new shares under the placement, the price of which will be determined via an accelerated bookbuilding process. The new shares will be settled Feb. 12.
TalkTalk's decision to team up with Infracapital came despite a partnership with broadband infrastructure provider CityFibre for fiber trials in the city of York. About 14,000 homes are currently connected to the network, with plans of increasing the number to 54,000.
"Given the scale of our business, the most important thing for us is to partner with companies based on their financial state and their ability to turn out a significant amount of return," Dunstone explained during the call.
Harrison added that TalkTalk is open to talks with other internet service providers that wish to purchase wholesale capacity from the new entity's fiber network.
The placement's net proceeds will be further used to strengthen TalkTalk's balance sheet, which the company also seeks to achieve through significant cost reduction measures.
One of the measures is a temporary cut in TalkTalk's dividend to 2.5 pence per annum, with a final dividend of 1.5 pence to be issued for current fiscal 2018.
With this "disciplined approach to trading," CFO Kate Ferry expressed confidence that TalkTalk will be able to generate cash in the lead-up to fiscal 2019.
"We aim to bring down debt and achieve further reduction in [fiscal year] 2020," she explained.
The company now intends to focus on its core fixed-line broadband business which, along with investments in fiber, is expected to "radically simplify the business," Harrison said.
TalkTalk's headline group revenue during the third quarter of fiscal 2018 ended Dec. 31, 2017, increased 1.0% year on year to £388 million. The growth rate is an improvement from a 0.8% growth in the second quarter and a 1.8% decline in the first quarter.
On-net revenues remained flat year on year at £316 million, mainly due to the offset of expenses from recontracting activities by changes to legacy package pricing and a higher customer base year on year. The recontracting derives from a strong demand for TalkTalk's Fixed Low Price Plans scheme, which generated 1.8 million subscribers by the end of the quarter or 61% of the retail customer base.
Corporate revenue reached £72 million, up 5.9% compared to a 1.4% decline in the second quarter and a 3.0% increase in the third quarter of fiscal 2017. The increase is attributed mainly to a 7.7% growth in revenue from data services at £42 million, brought about by an additional 1,800 new subscribers to TalkTalk's business ethernet services.
Given the developments, TalkTalk has revised its full-year EBITDA outlook for fiscal 2018 to between £230 million and £245 million. However, this is below the previous guidance of £270 million to £300 million as of the first half.
