When plotting a unsuitable merger, prepare to dig two graves
UK telco Vodafone could face an investor revolt if it bought the ‘low-quality’ operator Talk Talk, analysts from the investment banking and telecoms sectors have claimed.
After UK broadband provider Talk Talk asked investment bank Lazard to search for potential buyers and field approaches, rumours have circulated in the media that Vodafone is considering a merger.
Talk Talk, once listed on the FTSE 250, was discredited after allowing the credit card details of its 4 million customers to be stolen. The mishandling of the crisis, and the revelation that the stolen data hadn’t even been encrypted, led to the resignation of CEO Dido Harding.
In 2020 TalkTalk became the subject of a £1.1bn takeover by Toscafund, which valued the broadband provider at £1.8bn. The deal took the ISP private and gave it more options for future plans deals, such as taking a controlling interest of fibre to the premises (FTTP), backing the installer Freedom Fibre and buying Ethernet provider Virtual1.
According to reports, Talk Talk would want Vodafone, valued at £36billion, to find another £3billion to acquire it. “Rather optimistic for an ISP that doesn’t have any significant fixed line broadband infrastructure to call its own, excluding their old unbundled LLU network, and largely just piggy backs off OpenReach, City Fibre and Freedom Fibre,” said analyst Mark Jackson at ISP Review.
The verdict of Carl Murdock-Smith, telecoms analyst at investment bank Berenberg, was that any acquisition of Talk Talk would be received poorly by shareholders of the company buying it. “If Vodafone does go ahead with an acquisition, a lot of people would ask why they didn’t do this the last time Talk Talk was up for sale,” Murdock-Smith told the Mail on Sunday.
“Investors are looking for Vodafone to either do disposals or mergers, not acquisitions of low-quality operators,” said Murdock-Smith.
Toscafund is run by Martin Hughes, who known as The Rottweiler in City of London circles because of his aggressive style when agitating for change at firms he invests in. Hughes became chairman in 2017 after Dido Harding had resigned. That management style might clash with activist investor Cevian Capital, which has a stake in Vodafone and has since been pushing for change in the way it is run.