Carphone buys Tiscali UK for £236m

Carphone Warehouse is set to become Britain’s second largest broadband provider after it agreed to pay £236m in cash for the UK assets of Tiscali, the Italian telecoms group.

Carphone said it would be funded by its existing debt facilities and would raise its earnings earnings per share by 10 per cent in the current financial year to March 2010.

The move will also see Carphone move ahead of Virgin Media to become the UK’s second largest broadband supplier behind BT. It is currently third with 2.7m customers at December 31, according to Enders Analysis, the research group, but ahead of British Sky Broadcasting in fourth. Tiscali, the country’s fifth largest broadband supplier, has 1.7m customers but has been losing customers.

The news sent Carphone shares 12p or 7.6 per cent higher to 170p in afternoon London trading while shares in Tiscali, which also announced plans for a capital hike of €210m, were 3.7 per cent higher in Milan at €0.4465 in Milan.

A deal for Tiscali UK has been widely anticipated by investors fearful that it lacked the economies of scale to survive in the Italian and UK broadband markets.

But Tiscali has come under pressure in the last year to sell its UK assets to reduce its onerous borrowings. At €601.1m ($792m), Tiscali’s net debt is more than three times its earnings before interest, tax, depreciation and amortisation. The uncertainty has meant the shares have lost more than 80 per cent in value in the last 12 months.

Carphone made an informal offer of £550m in May last year, but it was rejected. Tiscali subsequently entered into exclusive talks with BSkyB over a sale but talks were called off in March with the parties unable to agree a price.

The deal is set to give Carphone around 25 per cent of the UK residential broadband market. Analysts at Citi argued that anything below £250m meant Carphone was getting the 1.8m customer case cheaper than it could otherwise acquire customers in the domestic marketplace.

“Given UK broadband penetration is about 65 per cent, mergers and acquisitions is the only way to grow the customer base in bulk,” Andrew Lee, analyst at Citi, told clients yesterday.

Analysts have also pointed out that the scale of the customer base would give Carphone in a stronger negotiating position with BT on wholesale fibre rates if fibre optic-based broadband services became an important service in the UK.

Tiscali said the deal had helped it agree the key terms of its debt restructuring plan. In addition to the proceeds from the sale of Tiscali UK, it will also raise up to €210m to strengthen its capital structure.