It’s been a while since TalkTalk had anything to shout about. Shrinking profits, mounting costs and uncomfortable levels of debt are more of a ‘mumble into your coffee’ kind of story than a ‘proclaim from the rooftops’ sort.
Today, it announced a profit warning (full-year EBITDA expectations have been cut from £270-£300m to £230-£245m), a further reduction to the dividend (from 7.5p to 2.5p) and a plan to raise £200m in fresh equity to strengthen its balance sheet.
Yet founder and executive chairman Charles Dunstone is loud and clear that this is an investment in future strength, rather than an admission of current weakness.
‘We are making good progress towards putting TalkTalk at the heart of Britain's fibre future by building a full fibre network, bringing faster, more reliable internet to millions of homes and businesses,’ Dunstone said. ‘Looking ahead we see real opportunity to continue growing the core business whilst also investing in full fibre. We have therefore strengthened our balance sheet and temporarily reduced our dividend to take full advantage of the opportunities available.’
He’s certainly putting his money where his mouth is, announcing that he and TalkTalk’s other directors will purchase more than £40m of the fresh equity themselves.
You can sum up why TalkTalk needs all this extra dosh in two words: full-fibre. The already deeply competitive telco sector is in the midst of a scramble to take the country’s broadband network into the 21st century. BT-owned Openreach recently pledged to connect three million premises to full fibre by 2020 (10 million by 2025).
TalkTalk intends to match that through a £300m investment in a joint venture with Infracapital, which will provide another £1.2bn. No time limit was set for achieving this, however.
In good times, the company may have been able to fund this investment itself, but times haven’t exactly been good. The company acquired unhealthy levels of debt (net debt was £837m in September) as it attempted to compete with the larger ‘quad players’, prompting the painful and pricey decision to exit the mobile market last year.
With a flat-ish top line (revenues are expected to grow by 1% this quarter, after falling nearly 5% in the first half of the financial year) and bumpy bottom line (H1 pre-tax loss: £75m), finding more cash from the equity markets was the only safe way to enter the full-fibre battle.
Whether it will be worth it remains to be seen. So far the market’s unimpressed – shares fell 10.7% by lunchtime.
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