BT buys Talktalk: Safety net or stitch up?

Good afternoon. This is your midday market update from City AM.

The long-running saga over the fate of struggling telco Talktalk finally came to an end this morning after BT unveiled an agreement to swoop in and rescue it.

Is this great news? That rather depends on who you ask.

If you ask BT, the FTSE 100 telco says its takeover is an act of great magnanimity, one of “public service”:

“BT recognised the risk to the country,” the firm said, “and especially vulnerable customers and key public services, should the company collapse.

“BT therefore approached the Directors of Talktalk and offered to step in immediately, in the public interest, to protect customers and critical national infrastructure.”

In a not terribly subtle nod to Andy Burnham’s “hope again” rhetoric, chief executive Allison Kirkby added that the tie-up shows BT “is the digital backbone of the country, with a presence in every postcode.”

BT shareholders seem to like the deal too. The stock was up two per cent to 200p by mid-morning.

Others in the industry have a different view. Virgin Media O2, which is part owned by billionaire John Malone’s Liberty Global, did not pull its punches:

“This has all the characteristics of a stitch up masked as a rescue deal in the public interest”, said a Virgin Media spokesperson.

The company said it appeared competition rules could be watered down so the incumbent could “roll its tanks over competition and further tighten its grip on the market”.

“The logic simply doesn’t add up”, the spokesperson added. “We don’t believe rules should be thrown out the window to allow Talktalk to fall into BT’s lap without a proper process and we will be raising our concerns directly with government and regulators”.

Whichever interpretation is the right one, it’s clear BT has been able to swoop in on the cheap. The company said the takeover would result in a “cash impact” of £400m, comprising a £60m loss, £100m that was due to Openreach and “consideration, transaction and administrative costs.”

In other words, the amount BT paid for the business itself was barely more than £100m. That is a far cry from the more than £1bn Talktalk fetched when it was poached off the stock market by asset manager Toscafund a mere five years ago.

Since its creation by Carphone Warehouse (remember them?) in the early noughties, Talktalk had always been a relative minnow in an increasingly concentrated telco market and struggled to turn a profit in the face of its mighty rivals.

The debt piled on to the business by the 2021 takeover ultimately proved too difficult to manage. Talktalk went from a business with 4.6x debt to EBITDA ratio at the start of the decade – broadly in line with peers – to almost 9x ratio by 2025.

Refinancing proved more and more difficult with each passing year, and its credit rating tumbled – down to a junk “D” rating from S&P in October last year. The company ultimately entered into “PIK” or payment-in-kind debt deals, a last-resort option in which a firm seeks to pay off debt interest commitments by issuing even more debt, at higher rates, a move which S&P said was “tantamount to a default.”

Aside from BT and Toscafund, Talktalk founder Sir Charles Dunstone and private credit firm Ares, both of whom were major lenders, could lose out depending on the terms of the deal. Ares could mount a legal fight if it doesn’t get a major payout.

Regulatory scrutiny could also put a spanner in the works – and culture secretary Lisa Nandy has already signalled a desire to intervene. For a while yet, BT will have to hold the line.

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