Uk broadband provider talktalk joined the growing list of listed telecoms companies set to go private this week when it said it was considering a takeover approach from the hedge fund that is its second-largest shareholder.
Britains fourth-largest provider, with 4.2m customers, has in effect been up for sale for years, but there was a widespread expectation that it would eventually be snapped up by one of its larger rivals, as a key asset in the consolidation of the uk market.
Instead it is toscafund, which already owns a near-30 per cent stake, that has lodged a 97p-a-share offer that amounts to 1.1bn, or 2bn including debt. the deal is contingent on the participation of charles dunstone, the billionaire chairman who also owns close to 30 per cent of the business.
If agreed, it would represent another example of the creeping privatisation of european telecoms following on from patrick drahis move to buy out altice, the sale of assets to infrastructure funds and the acquisition of masmovil by kkr and cinven which is being driven by low valuations and investor pressure on management teams to consider new options.
Talk of a talktalk takeover is not new. both vodafone and virgin media have considered it in the past, according to multiple people with direct knowledge of the situation but were put off by its valuation, even as its shares sank to less than a third of their peak this year.
Virgin medias decision to merge with o2 this year has rekindled consolidation talk. that deal creates a combined broadband-mobile business that can compete with bt and its ee mobile business. it also narrows the options for smaller providers vodafone, three, sky and talktalk.
Toscafunds latest approach is not its first: it offered to buy out talktalk at 135p last year but was rejected. it may now succeed with the lower offer, which reflects the collapse in the value of listed european telecoms companies. talktalks board, like most others in the sector, has become frustrated that progress strengthening the companys balance sheet and improving its operating performance have made no difference to its share price according to one board member.
Although 97p a share is a hefty-sounding 26 per cent premium to the average price in the past six months, it is half the level of 2017, when talktalk was still recovering from the effects of a damaging cyber attack.
Neither would the takeover address the imbalance in the market between the two large integrated providers and the rest. one investment banker said european telecoms markets are starting to split into two distinct camps: large combined groups like bt-ee and virgin-o2, and lean, low-cost operators including iliad and masmovil. if youre caught in the middle ground, it is a problem, he said.
Barclays calculated that after the virgin-o2 deal closes, bt-ee will make up around 50 per cent of uk industry earnings, virgin-o2 around 30 per cent, with vodafone accounting for around 10 per cent and hutchisons three only 6 per cent.
Yet there is no sign of a trade buyer preparing a talktalk counter bid in the wings. one person with direct knowledge of one potential bidders strategy said that even at 97p-a-share, toscafund valued talktalk at a much higher price than anyone else. another company said there was little point considering a rival offer because talktalk going private would do nothing to change the structure of the market.
For a company like vodafone, which has been very acquisitive in global telecoms, its own strategy to reduce debt and buy broadband network assets looks at odds with any move on talktalk, despite the attractions of its 4m customer base and 1.6bn of uk revenues. taking on talktalk, a value player with scant network assets that is midway through a restructuring, could also disrupt its own recovery plan in the uk after years of underperformance in its home market.
Threes uk management team has called for consolidation in recent months to help settle a dysfunctional market. it has highlighted a desire to expand into the business telecoms market to compete with bt, virgin media and vodafone. talktalk has a good foothold in this business.
However threes owner ck hutchison has not previously shown an interest in buying into the broadband market.
Investment bankers argue a combination of mobile phone businesses vodafone and three in the uk is a more likely scenario in the long term even though european regulators have blocked mergers in the past. vodafone merged with three in australia a decade ago and this year combined with broadband player tpg, a model that could be followed in the uk over time.
Talktalk may go private having failed to attract a trade buyer as a listed business, but it could still play a role in future consolidation as uk telecoms groups plot the best way to stay in the black.