Carphone Warehouse Group has agreed to buy Time Warner unit AOL’s UK Internet access business for 370 million pounds (US$689 million) in cash, transforming the mobile phone retailer into Britain’s third biggest broadband provider, the two companies announced in a joint statement to the London Stock Exchange.
The all-cash transaction will give Carphone Warehouse an extra 1.5 million high-speed Internet access customers to add to an existing base of 625,000, propelling it up to third place in the broadband league table behind BT and NTL.
In recent months, Time Warner has sought to shore up dwindling global market share with the sale of AOL Deutschland to Italy’s Telecom Italia, and AOL France to French telecoms group Neuf Cegetel.
The US giant, who has sold its European access business to create an advertising-driven Internet business, said that it would manage online advertising sales for Carphone Warehouse in a revenue-sharing agreement.
The deal also sees AOL provide co-branded portal and content services to Carphone.
Taking on the Big Guys
This deal gives us significant scale to complement the rapid organic growth of our free broadband proposition," said Carphone Warehouse chief Charles Dunstone in a statement.
Carphone Warehouse hopes the deal will give it sufficient scale to present a credible threat to BT in the consumer broadband market, where new entrants like British Sky Broadcasting Group and the "big four" mobile phone companies are driving down prices all the time.
"This agreement completes the restructuring of our AOL Europe businesses that both advances AOL’s strategic transition to an advertising-supported business model and underscores Time Warner’s commitment to shaping its portfolio of assets to drive the greatest growth possible," Time Warner chief executive Dick Parsons said in the statement.
He added: “As a leading provider of audience services in Europe, AOL will be better positioned than ever to continue to grow a cohesive online advertising business across a region that’s key to our future progress.”
However, analysts warned that swallowing a much larger business could prove a step too far for Carphone Warehouse’s TalkTalk fixed-line unit, which has struggled with a host of customer-service problems since launching its "free" broadband in April.
The company has struggled to cope with a flood of orders since the launch of its 21 pounds ($39) a month landline and broadband package and it has had to hire extra customer support staff and rent more wholesale broadband capacity from BT.
BroadBand Costs
Carphone expects costs at its broadband arm to be 70 million pounds this year, compared with earlier guidance of 50 million.
The rise stems from hiring hundreds more customer service staff to cope with demand, and also from slow progress in local loop unbundling, which involves taking control of the lines that run from former monopoly BT’s phone exchanges to customer homes.
The debt-funded deal allows Carphone Warehouse to compete more effectively in the broadband Internet market with dominant telecoms group BT, satellite broadcaster BSkyB and mobile telephone companies such as O2 and Vodafone.
The acquisition of AOL’s UK internet access business is transformational for our broadband business, said Dunstone, adding that the deal would give the company "significant scale".
Under Carphone’s "free broadband" offering, customers signing up to spend about 20 pounds a month for its fixed-line service and line rental get free high-speed Internet access. Carphone said it had seen no let up in people signing up for its offer — 15,000 a week — and would transfer "significant" volumes of users to unbundled lines in the next three months.
Earnings Boost
Buying AOL UK should boost pretax earnings by 10 million pounds ($18.6 million) in the current fiscal year and by between 30-40 million pounds ($56-74 million) next year, said Dunstone.
Aside from acquiring AOL’s 1.5 million broadband customers, Carphone Warehouse has also agreed to buy AOL’s telecoms infrastructure — a move that will accelerate the creation of its own "local loop" network.
“The additional scale is likely to create significant operating efficiencies in relation to network infrastructure and marketing costs,” said the group.
The disposal of AOL UK was expected to complete by December 31 and would be subject to approval by EU competition authorities, the statement added.
AOL UK is one of the biggest Internet service providers in Britain with 2.1 million customers nationwide. Carphone Warehouse will also pick up some 0.6 million dial-up Internet access customers as a result of the transaction.
Time Warner’s AOL, once the Internet’s dominant player, had said in August that it would lay off about 5,000 employees or a quarter of its global workforce as it undertook a mammoth restructuring.
AOL, formerly known as America Online, is a shadow of its former self. Just a few years ago, it was an Internet colossus and the driving force of the 2000-2001 “mega-merger” with Time Warner.
In the years since, however, it has weathered an accounting scandal and been relegated to one of the many divisions in Time Warner’s sprawling media, film, publishing and entertainment empire.
Sources close to the matter had told Reuters that Carphone and pay-TV group BSkyB Plc was in the running to buy AOL UK, which is the last of the U.S. group’s European units to be sold.