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Muscles flexed with broadband win

The last big acquisition in the consumer broadband market looks to have been done.

After a lengthy auction, Tiscali, the Italian telecoms company, announced on Friday that it was selling its UK broadband assets to Carphone Warehouse for £236m in cash.

The deal reinforces Carphone’s position as one of the big four operators in the UK broadband market, where profit is based on economies of scale.

Charles Dunstone, Carphone’s chief executive, hailed the company’s “extraordinary achievement” of becoming a leading broadband provider in slightly more than three years. Carphone’s rivals – BT, Virgin Media and British Sky Broadcasting – declined to comment.

Mr Dunstone unleashed a broadband price war in April 2006 by offering “free” broadband to customers who signed up to the company’s fixed-line phone service.

He was offering cheap phone calls and broadband compared with rivals, and consumers flocked to Talk Talk, his telecoms business.

Carphone has gone from having 168,000 broadband customers in March 2006 to 4.25m, assuming the Tiscali deal is completed.

Carphone was the eighth-largest broadband provider three years ago. With Tiscali’s UK assets, it will be the second-largest.

Carphone is likely to get rid of the Tiscali brand in due course, but the deal is unlikely to herald further cuts in broadband prices.

Carphone is increasing its prices, albeit by a limited amount, partly because of an expected rise in charges that BT imposes on rivals for renting parts of its fixed-line network.

Citigroup analysts said the Tiscali deal made financial sense for Carphone. At £236m, they estimated Carphone was paying the equivalent of £150 for each of Tiscali’s broadband customers.

The Tiscali deal is a chance for Carphone to make up lost ground. In late 2006, when the broadband market was growing fast, Carphone alienated many customers when it started a process known as local loop unbundling.

It involved moving the Talk Talk customers off a wholesale broadband service bought from BT and on to Carphone’s fixed-line network.

Significant numbers of customers lost their broadband connections during the process, and Mr Dunstone had to placate angry consumers.

The problems compelled Carphone to curb its landgrab for customers, and rivals signed them up instead. Carphone decided to gain size through acquisition, and bought the UK assets of Time Warner’s AOL internet access division in December 2006.

Ian Watt, analyst at Enders Analysis, said: “Carphone somewhat missed the opportunity to grow rapidly with the ‘free broadband’ offer because of the customer service problems. The acquisition of AOL helped to an extent, but the Tiscali deal seals Carphone’s position.”

However, Mr Watt and other analysts pointed to significant risks attached to the Tiscali deal, which will determine whether Carphone secures its £40m-£50m of synergies by March 2011.

The cost savings should mainly come from moving Tiscali’s customers on to Carphone’s network, and its billing systems. Mr Dunstone admitted that moving customers off Tiscali’s billing systems, which are based in Sardinia, would be a big challenge.

Источник: Financial Times

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