BT’s Openreach, Cityfibre and Sky could all catch waves from a no-deal
Virgin Media O2’s (VMO2) intended acquisition of broadband provider TalkTalk is probably off the table, according to The Daily Telegraph, after months of well, talktalks.
Some had been talking about a possible price tag of £3 billion. Others in the City of London were dubious, given that TalkTalk is indebted to the tune of £1.1 billion and recent market turmoil has prompted lenders to impose stricter covenants and its auditor to issue a warning about its accounting.
To add to its woes, as a budget operator, slow to move to full-fibre infrastructure, TalkTalk’s customers are typically those that will struggle the most in the cost of living crisis.
How we got here
TalkTalk was spun off from The Carphone Warehouse group in 2010 by its billionaire founder, Sir Charles Dunstone. TalkTalk suffered reputational damage and a record fine after a huge data breach 2015. Sir Charles took TalkTalk back into private ownership last year along with Toscafund.
Any breach of lending covenants could require Sir Charles and Toscafund to inject more equity to stabilise TalkTalk’s balance sheet.
Any port in a storm?
Apparently TalkTalk is now in “detailed talks” with BT’s infrastructure arm Openreach, according to the newspaper report, about a deal to gradually move its 4 million customers onto Openreach’s rapidly growing full-fibre network.
The big attraction of the proposed takeover, from VMO2’s point of view, was the savings to be had from moving TalkTalk’s customers onto its own infrastructure. TalkTalk and Virgin Media O2 are still negotiating about the possibility of moving some TalkTalk customers onto the VMO2 network under a wholesale agreement.
A full-fibre deal with BT could be problematic as TalkTalk’s has a relationship with the alternative fibre network provider Cityfibre, which is backed by Goldman Sachs and Abu Dhabi’s sovereign wealth fund.
Cityfibre has alleged that the terms offered to resellers by Openreach are anti-competitive, although its High Court claim failed on a technicality.
Meanwhile, Openreach wants to secure a deal with Sky to avoid it moving its broadband customers onto Virgin Media O2’s network. Last year Openreach announced its wholesale price-setting strategy, known as Equinox 2 and it seems Openreach is now ready to go further. On Sunday, ISPreview reported that BT’s broadband unit looks ready to launch the next round of wholesale prices cuts.
How far will the ripples spread?
As yet there has been no suggestion that the proposed Vodafone UK and Three UK merger has been endangered by market conditions, and as the UK is no longer part of the European Union, it should not be affected by the most recent U-turn by the EU’s courts regarding the consolidation in European mobile markets.
In short, the proposed merger of Telefonica’s O2 UK and Three UK (owned by CK Hutchison) was blocked on anti-competitive grounds in 2016 by the European Commission. Three challenged the decision and in 2020, the EU’s second-highest court, the General Court, found there was little or no evidence provided to prove the move would have been anti-competitive and to the detriment of customers.
Last week, Juliane Kokott, Advocate General at the EU Court of Justice, overturned that judgment and called for the case to be referred back to the General Court for a fresh ruling. Sigh. Just six years on and still no clarity or consistency of thought, and a potentially big blow to those hoping for a more sympathetic regulatory approach to consolidation among operators staggering under the weight of massive debts.