Is TalkTalk vulnerable to takeover?

The telephony and broadband division of Carphone Warehouse is set to be sold. Why is Carphone selling and who is likely to be interested…

The story of the Carphone Warehouse is generally one of foresight, of spotting an opportunity and then positioning itself in the optimum place to maximise it.

While many of the big brand names in the mobile communications market were but glints in their creators' eyes, Carphone Warehouse was embracing the necessary technology, and it's been richly rewarded as a result.

Since 2003, meanwhile, TalkTalk has been operating as a subsidiary to the main Carphone Warehouse business. And while the parent company has sold the necessary technology, TalkTalk has been responsible for the accompanying fixed-line telephony and broadband services.

Off the back of heavy promotion, including at one stage sponsorship of Channel 4's Big Brother reality TV juggernaut, the TalkTalk business has moved beyond initial customer service teething troubles and grown to over 2.8 million broadband customers alone.

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It has also far expanded beyond just the UK, doing business across Europe in places such as France, Holland, Spain, Germany and Ireland, among others. In short, in the space of five years, TalkTalk has gone from being a name nobody has heard of, to one of the major communications players in the British and to a slightly lesser extent European marketplace.

Demerge

And yet today, parent company Carphone Warehouse has confirmed plans to review the structure of the overall business, effectively hoisting a For Sale' sign over top of the TalkTalk business. This was first rumoured in the Sunday Telegraph over the weekend, as it reported that chief executive Charles Dunstone had asked the firm's bankers to look into ways that TalkTalk and Carphone Warehouse could be separated out.

Inevitably, the reason for this is tied to the financial problems that have been prevalent in the world over the past few months, and that have seen share prices under severe threat.

In the case of Carphone Warehouse, while its results were unknown at the time of writing, its interim performance was expected to be troubling, and shareholders inevitably would look for action to turn that round.

Financials

The firm announced a pre-tax loss of 11 million today, and only some substantial one-off gain turned that back into a profit. It's still the third biggest provider of telecommunications in the UK, however.

The real area of concern is surely longer term, with the market uncertainty that's been caused by the onslaught of recession (particularly in the UK, and across the eurozone). At the very least, Carphone Warehouse would expect to be hit quite heavily through its retail operations where it's particularly exposed (the firm has nearly 2,500 stores across its European territories), and likewise broadband sign-up is also believed to be suffering.

With predictions as to the length of the current economic downturn at the very best painting a pessimistic picture of 2009, the business needs to prepare itself to weather some tough times in the short to medium term.

Drastic decisions

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That said, the demerging of the two businesses is a radical step, but then Carphone Warehouse is one of many firms that finds itself in a position where it needs to do something quite drastic. The value of the organisation has more than halved in the past 15 months, and drops are expected.

Right now, the total value of the entire Carphone Warehouse business is around 1.3 billion, against its peak of 3.4 billion in August of 2007. Of the current value of 1.3 billion, TalkTalk accounts for a substantial slice of the pie, with estimates valuing its worth to Carphone Warehouse at 900 million to 1 billion.

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