TalkTalk on the brink as dreams of budget broadband billions unravels

Telegraph

20 hours ago

As the modestly named American pianist John Legend took to the stage at Old Billingsgate Market in the City of London last week, one onlooker attracted almost as much attention.
Sir Charles Dunstone was a special guest at an annual corporate jamboree hosted by Liberty Global, co-owner of the broadband and mobile giant Virgin Media O2.
Normally, the presence of the chairman of a partner and rival would be nothing unusual at such an event. But Sir Charles's own broadband business TalkTalk is on its knees and the main topic of telecoms industry gossip. It narrowly avoided collapse last year, and has now sparked turmoil across the sector after falling behind on payments to suppliers.
While Sir Charles indulged in some easy balladry, TalkTalk's future hung in the balance. Its predicament has sparked alarm in Whitehall over fears that more than three million customers could be left in the lurch if it collapses.
As the company struggles under an exodus of customers and crippling debt costs, Sir Charles is attempting one last throw of the dice: an ambitious scheme to break up the business and sell it off for parts.
It raises the prospect of an ignominious ending for Sir Charles, the founder and executive chairman whose shareholding risks being wiped out in any future deal. With TalkTalk on the precipice, can bosses carve a path to survival for the broadband supplier?
TalkTalk's troubles have been a long time in the making.
Sir Charles spun TalkTalk out of his mobile phone retailer Carphone Warehouse in 2010 and grew it into a major broadband provider targeting the budget end of the market.
But a series of acquisitions, coupled with a highly leveraged £1.1bn take-private deal in 2021, loaded the company up with debt.
As competition in the broadband market has grown more fierce and margins have narrowed, this balance sheet strain has taken its toll.
TalkTalk was saved from insolvency in an 11th-hour rescue deal last year, with Sir Charles and other shareholders including major investor Toscafund pumping in £235m to keep it afloat.
Yet the bailout has done little more than kick the can down the road.
TalkTalk, which has around 3.2m customers, is still grappling with eye-watering repayments on its debts of £1.2bn. Making matters worse, revenues are in reverse as the company haemorrhages customers amid deep job and spending cuts.
The cash woes are such that TalkTalk has fallen behind on payments to suppliers including BT's Openreach in recent months. In response, BT has reportedly threatened to block TalkTalk from putting new customers on its network.
TalkTalk argues that it has a fully-funded business plan and that its cost-cutting strategy has begun to pay off. But with the prospects of a turnaround looking slim, the company is now poised for a full break-up.
Bosses are hiring advisers to oversee a sale of the group's consumer and wholesale divisions. TalkTalk has already sold its business-to-business unit back to its shareholders in a £95m deal.
However, observers point out that the break-up could put off potential suitors as they would be hamstrung by complex agreements between the consumer and wholesale arms.
James Ratzer, an analyst at New Street Research, says: 'I think any buyer would be most interested in the whole company to give them flexibility to restructure it as they like.'
Should a sale not materialise, TalkTalk's bondholders – largely consisting of asset managers – could end up taking control of the company.
Either way, these outcomes would be likely to cement an embarrassing misstep for Sir Charles, who founded his telecoms empire from the boot of a car.
The tycoon has previously rebuffed attractive takeover offers, including a £3bn approach from Virgin Media O2 (VMO2) three years ago. Now with TalkTalk's equity value thought to be zero, he risks being left empty-handed.
'We struggle to see any scenario in which the sponsors will be able to get any equity capital returned to them,' said Ratzer.
'Surely last year they should have refused to put in new capital and handed the business over to the creditors at that stage, rather than injecting further money?'
That ship has sailed, however, and shareholders must now decide whether to pump yet more money into TalkTalk, or bail out now.
Bondholders, who would be likely to take a haircut as part of any deal, have been pushing shareholders to stump up more money.
A source familiar with the matter said the company was in 'advanced' talks to raise an additional £100m through a combination of existing investors and asset sales.
Some of TalkTalk's bonds have slumped to trade as low as 44p in recent weeks, indicating a lack of confidence that the company will be able to repay its debts.
While this has now risen to 58p, it remains well below the price of around 80p in April.
Ares Management, which owns a stake in TalkTalk and provided it with a £440m high-interest loan, is now thought to be in the driving seat given its dual role as shareholder and debtholder. It took additional security over the company in last year's refinancing.
A source close to Ares said it was still 'very supportive' of the company.
Beyond the corporate intrigue is a political headache for the Government. With financial troubles mounting, government officials have expressed concerns about the possibility of TalkTalk collapsing, according to multiple industry sources.
This would be of particular concern given TalkTalk is thought to have a significant number of vulnerable customers, including elderly people and those on lower incomes.
Regulator Ofcom has for several years been drawing up contingency plans in case of a supplier collapse, but these have largely been focused on the scores of 'alt-net' firms that have cropped up to challenge the dominance of BT.
'The expectation has always been that it would be an alt-net that would fail, not an established internet service provider', says Matthew Howett, at Assembly Research.
Karen Egan, at Enders Analysis, says: 'It will be worrying [the Government] because they do have a high proportion of vulnerable customers.
'I think there's a fear of a lot of disruption, but in the case of TalkTalk there's a lot of ways they can ensure the service doesn't ever go down.'
Potential options include a 'supplier of last resort' scenario, similar to the one used in the energy sector. This would see a trusted larger player, such as BT, appointed to take over TalkTalk's customer base should it collapse.
Alternatively, the Government could intervene to prop up the company for a limited period, giving customers time to switch to a different provider of their choosing.
Most people in the industry believe a full-blown insolvency is unlikely. 'I think everyone knows that there are safety nets in the market,' says one source.
But as TalkTalk's troubles deepen, larger rivals are starting to circle. Executives at BT have held early-stage discussions about a potential takeover amid concerns that the former monopoly's Openreach division is taking a hit from TalkTalk's customer losses.
VMO2 is also understood to be interested in a potential swoop after its previous approach failed. Mike Fries, the chief executive of VMO2's co-owner Liberty Global, is said to be close to Sir Charles.
However, any takeover bid by BT or VMO2 would trigger serious competition concerns and face protracted regulatory scrutiny. Sky, which has previously weighed up a bid for TalkTalk, is not thought to be interested.
As a result, Vodafone has emerged as a viable contender. The telecoms giant is in the throes of integrating mobile network Three following a £15bn merger and chief executive Max Taylor has insisted the company has 'no plans for inorganic activity' in its fixed business.
Nevertheless, VodafoneThree has earmarked broadband as a major opportunity for growth, so TalkTalk's sizeable customer base could prove an attractive proposition.
Any rescue deal would ensure continued service for customers and avoid a messy collapse, albeit while leaving Sir Charles high and dry. But with TalkTalk's survival far from guaranteed, officials will be keeping a close eye on how the crisis unfolds.
'The policy interventions in fixed broadband have been good up until now,' says Howett. 'It would be a shame to see the TalkTalk saga blemish that reputation.'
A spokesman for the Department for Science, Innovation and Technology said: 'It would not be appropriate to comment on speculation, or commercial matters relating to specific companies.
'The UK broadband market continues to be a highly competitive market with plenty of choice for consumers. Our priority is ensuring customers, particularly those with vulnerabilities, are protected as the market evolves.'