Carphone Warehouse goes for Fixed-Line Acquisitions

Carphone Warehouse has signaled its intention to become a serious competitor to BT and a major player in the telecoms market generally with the acquisition of OneTel for £132m and Tele2 for £8.5m.

These deals add 1.41m OneTel customers and 188,000 from Tele2 to the existing 1.1m users of CPW’s TalkTalk fixed-line service. That makes Carphone Warehouse the UK’s third largest fixed-line supplier, with more than 10% of the market, and chief executive Charles Dunstone doesn’t intend to stop there – “our goal is to become the number one alternative residential telecoms provider in the UK market”.
The operations of Onetel and Tele2 will be rebranded as TalkTalk and their residential customers will get free on-network calls “as quickly as possible”.

And why should Carphone Warehouse want more voice customers? Because of the economies of scale and the potential for selling them additional services – mobile phone services and (more important) broadband. There are currently only 50,000 broadband customers at OneTel , a handful at Tele2. Broadband can be  extremely profitable, and all those monthly subs are good for the cashflow.

Critically, you need scale for local-loop unbundling, the ability to displace BT as the owner and supplier of the wire that connects households and businesses to BT’s local exchanges. Control of the local loop removes a major overhead for telecoms independents, the need to pay BT for the use of the last few kilometres of cable. And of course it also earns money in the form of termination charges, levied when another network direct a call to customers on the local loop.

Following the recent regulatory changes, a number of suppliers have announced plans to place their kit in BT exchanges – and they include Carphone Warehouse, which plans to spend between £50m and £60m annually over the next three years to install its own local loops at a thousand BT exchanges.
The FT has estimated that local loop unbundling results in operating margins of about 30%. The old model of renting the line from BT has proved unprofitable for most operators.

OneTel UK was formerly owned by the gas supplier Centrica, which paid £58m for it in 2001 after the Australian telecoms firm collapsed. An interesting part of the present acquisition is an agreement under which Centrica will recruit a certain number of customers for Carphone Warehouse through its British Gas operations. The deal, which lasts for three years, effectively gives CPW a whole new marketing channel.
Meanwhile Tele2 appeared to blame Ofcom for its decision to pull out of the UK. “It’s important that you have a local regulator to push the incumbents, and from that perspective it’s taken longer in the UK compared to other countries … The way the market for alternative operators in the UK and in Ireland looks today, we can get significantly better returns by reallocating its budget to other markets.” In other words, Ofcom isn’t acting as speedily as it could to open up the market.

If there is a potential fly in the ointment, it probably isn’t BT. The broadband market is getting very competitive, and BT is already under pressure from big-name brands like Sky (which has just bought Easynet to be its own alternative network), Wanadoo, and probably Virgin (if the NTL takeover goes through, the cable operator will be able to rebrand as Virgin). One obvious short-term loser though is Cable & Wireless, which had been making money by providing the network for OneTel.

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