Under the terms of the deal, Carphone is to pay 370m pounds ($686m) to make it the third largest ISP in the UK, and will dramatically increase the pressure on market leaders BT Group Plc and NTL Corp. AOL UK had approximately 2.1 million ISP customers, made up of 1.5 million broadband customers and 600,000 dialup customers.
The acquisition of AOL’s UK internet access business is transformational for our broadband business, said Carphone’s chief executive Charles Dunstone. Shares in the company rose 8.7% to 362.5 pence ($6.72) on afternoon trading on the London Stock Exchange.
It is thought that Carphone had been bidding against rivals such as BT, mobile phone operator Orange, and UK satellite broadcaster British Sky Broadcasting Group Plc.
Carphone is to keep the AOL brand name, with AOL providing content for a joint portal using Carphone’s TalkTalk and the AOL brand. AOL will also manage the online advertising sales for the combined customer base.
Carphone said it is funding the deal via an extension to its existing debt facilities. For the year ended December 31, 2005, AOL UK posted an operating profit of 14.1m pounds ($26m) on sales of 442.1m pounds ($820m). The deal is subject to EU competition authority clearance and is expected to close by the end of the year.
It emerged earlier this year that Time Warner Inc, the owner of AOL, had undertaken a strategic review of its European business, similar to the review carried out last year for the US operation of AOL. The review was prompted by Time Warner’s then strategy to appease shareholders concerned with what they saw as an AOL drag factor on the overall Time Warner business. That review led to search engine giant Google Inc paying Time Warner $1bn in December 2005 for a 5% stake in America Online Inc.
In Europe, AOL had roughly 5.9 million customers, including 2.1 million in the UK, which was by far its largest European market. Its other principal markets were Germany and France, although there was also a small operation in Spain.
Following months of speculation, it was announced on September 18 that Telecom Italia SpA was paying 675m euros ($870m) cash for Time Warner’s AOL Germany internet access business to make TI Germany’s second largest ISP. AOL Germany added approximately 1.1 million broadband and 1.3 million narrowband subscribers to give TI 3.2 million subscribers in Germany, including nearly 2 million broadband customers.
Days later, the French alternative fixed-line carrier Neuf Cegetel SA reached an agreement to purchase the internet access business of AOL France, for 288m euros ($368m) in cash. The acquisition of AOL’s French internet access business, included 500,000 broadband customers, and its AMSE operation, which managed AOL France’s customer service operations. The deal means that Neuf Cegetel now has 2 million ADSL subscribers.
Carphone said the AOL UK purchase would help boost its pretax profits this year by 10m pounds ($18.5m). This is fortunate for the London-based company because it allowed it to offset its warning to the markets that it was expecting 20m pounds ($37m) of additional costs for the year ending March 31, 2007, as a result of strong demand for its free broadband for life package announced in April. Overall, costs for this free service has now risen to 70m pounds ($130m).
For the past year, The Carphone Warehouse has been in the process of going through a quiet transformation from a high street-based mobile phone retailer into a telecoms company with a retail arm. At the end of last year it signaled its intentions in the fixed-line market with the 154.2m pound ($271.8m) acquisition of UK telecoms provider Onetel from utilities company Centrica Plc. This acquisition added 1.1 million customers to its TalkTalk service. It also paid 8.5m pounds ($14.9m) for Tele2 UK Communications Ltd and Tele2 Telecommunications Services Ltd (Ireland) from Pan-European telecoms company Tele2 AB. That deal added approximately 188,000 customers in the UK and 36,000 in the Republic of Ireland.
Yet Carphone has faced criticism over the delays in signing up new broadband customers, as its free package relies heavily on its LLU process (otherwise it has to rent line capacity from BT). It has so far received 625,000 applications for its free broadband package, but has only made 421,000 live by the end of September. In June, Dunstone admitted that Carphone’s biggest problem was its lack of call center staff to deal with the estimated 100,000 calls a week.
The unprecedented take-up of our free broadband offer means we have accelerated our customer service recruitment plans and incurred additional wholesale broadband costs, Dunstone said on Wednesday in a second-quarter trading update. However, our underlying performance in the first half has been ahead of our expectations, and we expect our interim headline pre-tax profits, before the impact of our broadband and Virgin Mobile France operations, to be up 50% year-on-year.
