TalkTalk reviews options after Vodafone approach

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TalkTalk has asked investment bank Lazard to review its options after several groups, including Vodafone, approached the UK broadband company about potential deals, according to people briefed on the matter.

British telecoms executives have long called for greater consolidation in the domestic broadband market, claiming that the array of companies supplying mobile and internet contracts has created excess competition, driving down prices and stifling investment.

The sector has suffered from weak returns and falling valuations in recent years, as highly competitive markets and regulatory pressures led to top-line pressure and earnings decreases.

Vodafone, the fifth-largest player in the UK broadband market, has looked at the possibility of doing a deal with TalkTalk multiple times in the past but has tripped up over questions around the value of the business, according to people with direct knowledge of the matter.

TalkTalk was taken private just 16 months ago by Toscafund, an asset manager run by the Brexit-supporting Tory donor Martin Hughes, for 97p per share, valuing the company at £2bn including debt.

The internet company was advised by its independent directors in 2020 to accept the Toscafund bid on the grounds that TalkTalk would need significant investment in order to scale, which it would be difficult to achieve if it remained publicly listed.

Vodafone has been under particular pressure to revive its struggling business after it emerged that Europe’s biggest activist investor, Cevian Capital, had taken a stake in the company and is pushing for a structural overhaul.

Nick Read, the company’s chief executive, has said that he is looking to pursue deals in countries including the UK, Spain and Italy. But Vodafone ultimately missed out on a deal with Spain’s MasMovil this year, when the challenger group opted to pursue a merger with France’s Orange rather than buy Vodafone’s Spanish business for the price the UK telecoms group was asking, according to people with knowledge of the discussions.

In February, Vodafone also rejected a bid for its Italian business from French billionaire Xavier Niel’s Iliad and private equity fund Apax, saying it was “not in the best interests of shareholders”.

TalkTalk’s latest annual report showed that its customer base had shrunk from 4.3mn broadband customers in 2019 to 4mn in 2021. Revenue also declined from £1.6bn in 2019 to £1.4bn in 2021, though the company said this was due to the 2021 financial year including only 11 months rather than the normal 12, and also due to the impact of Covid-19 restrictions. Net debt increased to £972mn, from £950mn in 2020.

Before the company was taken private, there had been widespread speculation that it might be snapped up by one of its broadband rivals in a bid to consolidate what many executives complain is an overly competitive and “dysfunctional” telecoms market.

The company’s co-founder Charles Dunstone took over as chair after Dido Harding stood down as chief executive in 2017 following a damaging cyber attack that hit tens of thousands of customers. Dunstone backed the offer to take TalkTalk private, which was contingent upon him rolling over his stake into a new private vehicle that would own the company, allowing him to retain his 30 per cent stake.

TalkTalk was founded in 2003 as a subsidiary to the Carphone Warehouse, a company that Dunstone created in the 1990s and then listed on the London Stock Exchange in July 2000.

TalkTalk, Vodafone, Lazard and Toscafund declined to comment.

Additional reporting by Nic Fildes

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