Carphone Warehouse scales up with cut-price Tiscali deal

Carphone's £236m deal for Tiscali's UK arm propels it right to the top of the UK broadband business...

Last Updated: 30 Nov 2012

Carphone Warehouse has finally bought the UK arm of ailing broadband provider Tiscali for a knock-down fee of £236m, after a year of on-off negotiations. By snapping up the UK’s fifth-largest internet service provider – and more significantly, its 1.75m customers – Carphone’s TalkTalk division immediately becomes the UK’s largest residential broadband provider, according to CEO Charles Dunstone, with some 4.25m subscribers. That’s a pretty meteoric rise for a business that didn’t even start offering the service until 2004…

At first glance, £236m might seem like a lot of money to pay for Tiscali, given that it was on the verge of collapsing under the weight of its £535m debt pile. But if you consider the impact these extra subscribers will have on Carphone’s market share (it previously had about 2.7m subs, according to its most recent figure), it starts looking like a much better deal. In fact, Carphone has only managed to get it because the Tiscali business is in such a distressed state – although the Italian firm has scuppered previous offers (allegedly from the likes of Vodafone, BSkyB and BT as well as Carphone) by demanding too high a price, creditors have been cranking up the pressure since its auditors refused to sign its accounts off last month. So Carphone’s latest approach was well-timed.

Presumably Carphone will have done the sums, and realised this was by far the way the cheapest way to grab an extra couple of million customers. And Dunstone certainly thinks he’s bagged himself a recession bargain: he said today that the acquisition would start making money for TalkTalk from day one, potentially boosting this year’s earnings per share by 10%. He also expects to generate up to £50m in cost savings in the next two years, presumably by sacking people; Tiscali customers will probably hope that most of the cuts come in the Italian firm’s notoriously rubbish customer service team.

To be fair, TalkTalk doesn’t have an unblemished record in that department either; it got itself in trouble in 2006 when its ‘free broadband’ offer (the first of its type in the UK) was far more popular than it expected, meaning that demand outstripped supply quite substantially. But generally speaking, you have to say that its rise has been impressive: for a mobile phone seller to enter the fairly saturated broadband market and outstrip the big media companies in five years is quite an achievement. Now we just have to wait and see whether its customer service function can cope; if not, its pre-eminence may be short-lived...

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