10/13/2010 10:49:00 AM
Analysis: Is TalkTalk up for sale?
Vodafone and O2 are hot contenders to bid for TalkTalk within the next 18 months, according to leading telecoms and finance experts.
Fixed-line and broadband operator TalkTalk, which demerged from Carphone Warehouse earlier this year, is seen as a prime target for operators looking at ways to grow share in the converged market.
TalkTalk has 4.24 million subscribers and plans to expand into TV as a founding member of YouView, formerly known as Project Canvas.
Analysts believe both Vodafone and O2 are looking to expand rapidly into the converged sector through acquisition in order to build on their One Net and Joined Up b2b converged services.
Philip Carse, telecoms analyst at IS Research, tells Mobile: ‘It is definitely a possibility, if not a given. From a strategic viewpoint, the market is moving more and more to buying quad-play solutions and operators need to compete with the likes of Virgin with its mobile, fixed-line, TV and broadband offering, and BT, which is doing a big push into mobile.’
Carse says TalkTalk is the likeliest target but also tipped Telecom Plus and smaller companies such as Daisy Group as possible candidates.
He says: ‘TalkTalk is by far the most obvious one. Sky, BT and Virgin are very unlikely candidates – so if you are looking for a sizeable fixed-line business in the consumer sector that will deliver many millions of connections on a plate then TalkTalk is the one.’
Carse says operators could look to smaller companies, such as Telecom Plus, or to business telecoms companies such as Daisy or SpiriTel. However, he
adds: ‘The problem is operators would have to buy a number of them to get scale, whereas TalkTalk is a one-stop shop and for mobile operators it is all about big brands.’
Carse says Everything Everywhere and Three are unlikely to be on the acquisition trail for a fixed-line provider. ‘Three doesn’t have the funds and Everything Everywhere is too busy with its merger. I think it will either be O2 or Vodafone, which is under pressure to do something.’
Bid could happen next year
A bid for TalkTalk is likely to happen ‘within the next year or two’, says Carse, adding that the timing will be down to TalkTalk.
He says: ‘I am sure Vodafone and Telefonica have run their slide rules over it already but TalkTalk has just demerged and will want to grow as a separate company for a while.’
Adam Zoldan, director at Knight Corporate Finance, says rising data traffic and network capacity problems could also be driving operators to look at acquiring a fixed-line company.
Zoldan says: ‘Network capacity is a key issue. While the mobile network is finite, fixed-line capacity is that much greater, particularly when you look at the uptake of mobile data. There are a lot of capacity issues, so if operators could move some of their mobile data traffic onto a fixed-line network that would help alleviate capacity problems.’
Zoldan also tips TalkTalk and possibly Daisy Group as potential acquisition targets and believes a purchase could go ahead ‘within 12 to 18 months’.
However, Zoldan says mobile operators will find the fixed-line market much more competitive.
He says: ‘Mobile operators have so much control over distribution and manufacturers in their sector. Fixed-line is the opposite. There are no barriers to entry and competition is stronger. It is also easier to move the customer around so it will be interesting to see whether they can exert the same influence over the fixed-line channel.’
YouView will boost interest
TalkTalk’s involvement with YouView could significantly boost its ARPU, making it even more attractive as an acquisition target.
The new set-top based service, which will launch next year, will combine Freeview channels with web based and video on demand programmes, giving TalkTalk the chance to increase its current average revenue per user, estimated at £23.95.
In a recent briefing note, broker Daniel Stewart compared TalkTalk’s prospects to that of French operator Iliad. Analyst Mike Jeremy says: ‘Iliad’s quad-play offering has enabled it to raise its €29.99 base price ARPU towards €36 (£31.30), 31% above TalkTalk’s.
‘Our price target, 180p, is at the top end of a range of positive market ratings from 160p upwards, and is based on the expectation that TalkTalk will offer YouView services as a means of boosting ARPU.’
Operators likely to buy fixed-line provider, say Daisy and SpiriTel
SpiriTel CEO Alastair Mills says: ‘I am convinced a mobile operator will make a major acquisition in the fixed-line space in the near future. The mobile market is saturated with over 100% device penetration and fighting for market share is expensive. While existing customers will spend more on new services using smartphones, material growth will only come eating the lunch of the fixed-line players.
‘Both 02 and Vodafone have already identified the fixed-line space as an area for revenue growth. Vodafone has launched One Net and 02 launched the Joined Up programme but if you look at the revenue contribution from both programmes it is insignificant and will remain so if grown organically. To get scale they need to make a major acquisition – I expect Vodafone and/or O2 to write a big cheque for a fixed-line player within 12-18 months.’
Daisy Group CEO Matthew Riley adds: ‘It would make sense for either Vodafone, O2 or Orange to buy the skill set needed to run a successful SME and mid-market service provider because it would give them the opportunity to quickly build scale in the fixed-line environment and allow for cross selling in both directions. It would also be synergistic in terms of overhead costs and routes to market.’