opinion


Carphone/Tiscali…and then there were five

After nearly three years on the market, though some might say the slab, Tiscali’s UK assets are to be acquired by Carphone Warehouse for £236m: less than half the value of Tiscali’s overall debt. Snapping up the UK broadband market’s number four player for a bargain basement price, looks like a good move to boost the valuation of TalkTalk in advance of its possible divestiture later this year.

The acquisition will reduce to five the number of ISPs at the top end of the UK broadband market, comprising BT Retail, Virgin and the big LLUOs. This group accounted for 72% of the market three years ago. It now accounts for over 92%.

Simple maths puts the Tiscali subscriber base at 1.44m at the time of acquisition, based on: Carphone’s announcement of a new combined subscriber base of 4.25m and Carphone’s Q109 results, which showed TalkTalk with 2.809m. On this evidence, Tiscali has been in deep trouble for months, losing some 600,000 broadband subscribers since its peak of 2.02m subscriptions at Q307. Worryingly, even its LLU customer base has started to decline.

More simple maths (£236m divided by 1.44m) gives a premium per broadband customer of £160. Compare this to the premium per broadband customer of £250 paid for AOL UK in October 2006. Carphone will have its work cut out to prevent further decline in the valuation of this asset and faces another lengthy period of integration, to realise fully the cost-savings and economy of scale rationales which lie at the heart of this acquisition. It took two years to complete the integration of AOL, which had roughly the same number of subscribers at time of acquisition and roughly the same number of LLU lines.

In its acquisition statement, Carphone is consistent in its belief that in the LLU world, TalkTalk broadband is a business of scale: the bigger the subscriber base, the lower the fixed cost per subscriber, which allows TalkTalk to keep the monthly price of double play bundles pretty low. Whilst the acquisition makes TalkTalk the biggest single broadband ISP in the UK, it is Sky which has grown like topsy: 657,000 net adds in the 12 months to Q109, versus TalkTalk’s 93,000. Even Virgin has added 228,000 net new on-net subs in the same period.

This raises the question of whether brute size will win against multiplay bundlers like Sky and Virgin, particularly at a time when subscribers appear to be looking for the increased value which full triple play brings. And it’s not as if Tiscali’s foray into the TV market provides TalkTalk with a way in. It looks unlikely that TalkTalk will make any risky push into triple play for now, preferring instead to maintain its simple proposition as a cheap broadband-access-plus-voice provider. In terms of a long term growth strategy, with acquisition targets pretty much exhausted, TalkTalk will surely have to bite the triple play bullet at some point. In the investor webcast Charles Dunstone even hinted that the deal will bring the necessary scale to make investments in fibre viable.

The biggest immediate casualty will be Orange. Its position looks increasingly weak: a weak fixed/mobile proposition, a subscriber base which has now dropped below one million for the first time in three years, its inability to enter the TV market and its less than top-class reputation for customer services is not a great platform for survival.


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