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TalkTalk in £1.1 billion private takeover, Dunstone stays

TalkTalk has agreed to a £1.1 billion takeover bid from a pair of investment firms that will see it delisted from the stock exchange.

The announcement comes two months after the UK broadband provider first disclosed an approach from hedge fund Toscafund Asset Management, already its second-largest shareholder, and alongside the publication of its half-yearly results, which it described as “robust” but which clearly showed the impact of the Covid-19 pandemic.

Toscafund has teamed up with private equity investor Penta to broker the deal. The terms of the acquisition mirror those announced in October at £0.97 per share, but there is an alternative to this cash offer. Shareholders can choose to take shares in a newly-incorporated company, formed by Toscafund and Penta to carry out the transaction, for all or part of their stakes.

It appears that Charles Dunstone, TalkTalk founder and its largest shareholder with a 29.86% stake, will take the latter option.

“I am pleased to have the opportunity to continue to be a major shareholder in TalkTalk,” Dunstone said, in a statement.

“My decision underlines my passion for the company and the confidence the senior management team and I have about out journey ahead,” he said. “That said, as the UK transitions to full fibre we have a hugely challenging but exciting opportunity. Being a private company would allow us to accelerate adoption and focus on our role as the affordable provider of fibre for businesses and consumers nationwide.”

The fibre angle is doubtless what has attracted the investors involved in the takeover. And they believe that TalkTalk will benefit from becoming a private company from the point of view of its ability to invest in its business going forward.

Indeed, the acquiring company details its strategic rationale for the deal as follows:

“Tosca Penta believes that TalkTalk has demonstrated resilient performance during 2020 and notes the material decrease in its share price over the last 12 months. Tosca Penta has, therefore, concluded that operating in the public listed markets is not optimal for TalkTalk and that the next stages on its investment, strategy and long term growth can all be best delivered as a private company, without the significant governance, cost, regulatory and financial reporting burdens of a company listed on the London Stock Exchange. Tosca Penta further believes that TalkTalk will benefit from access to different forms of equity and debt financing structures that are not readily available to listed companies.”

The £0.97 per share offer represented a 16.4% premium on the telco’s closing price the day before the offer period began in October and a 17.3% premium on its volume-weighted average price for the six months to the same date. TalkTalk’s share price has barely broken the £1 barrier since early March, but prior to that traded at around or above the £1.10 mark for a period of about two years and went as high as £4-plus in mid-2015, before the high-profile cyber attack later that year brought the figure crashing down.

While it appears that Tosca Penta has taken advantage of some softness in TalkTalk’s share price, its independent directors have recommended that shareholders accept the offer.

Senior non-executive director Ian West described the cash offer as “fair and reasonable” and noted that it will enable shareholders to recognise immediate value for their shares. “The independent TalkTalk directors have also taken into account the risks associated in achieving TalkTalk’s strategic  ambitions and the wide support that Toscafund would provide in this regard,” he said.

Meanwhile, while Tosca Penta used the word “resilient” to characterise TalkTalk’s 2020 performance to date, and the company itself is bigging up its latest set of financials, there is some work to do on the balance sheet.

Revenues for the six months to the end of September were down 6.6% to £740 million, with a similar slide in what TalkTalk describes as headline revenues – essentially excluding MVNO revenues – to £736 million. EBITDA was down by 8.5% to £119 million and its statutory loss was £4 million, having turned in a small £1 million profit in the year-ago period.

“Given the ongoing uncertainty created by COVID-19, we will be withdrawing the current full year EBITDA guidance and we will not be providing updated formal guidance,” the telco said.

Its full-year results presentation will be the responsibility of Phil Eayres, who will accede to the CFO position once the acquisition takes place or on 31 March 2021, whichever comes first. He will replace outgoing finance chief Kate Ferry, who is leaving the company for geographic reasons: that is, she is keen to live and work in London, while the bulk of TalkTalk’s business is in the North West, CEO Tristia Harrison explained.

“Phil has worked alongside me and the board for over six years; and has been a driving force behind leading the group’s work on Full Fibre including the successful sale of FibreNation to CityFibre. He also has a long career in finance; and it is this mixture of financial, commercial, and strategic expertise that makes him the ideal candidate to help lead us going forward,” Harrison said.

It’s going to be an interesting ride for the new CFO, that’s for sure.

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