TalkTalk on the block, as Toscafund makes a bid

The hedge fund Toscafund has made a £1.1 billion ($1.42 billion) buyout bid for UK telecoms and Internet company TalkTalk.

"The Board has considered the terms of the Proposal and has agreed to progress the Proposal further," said TalkTalk in a statement.

Toscafund, with $4 billion in funds under management, already owns a 29.09% stake in TalkTalk. Its chief executive Martin Hughes has the nickname "the Rottweiler" for his tenacity in forcing companies to change, and intends to take the company private.

Its chairman is Martin Gilbert, though, who as former CEO of Aberdeen Asset Management, and afterward joint CEO of Standard Life Aberdeen, knows a thing about mergers.

The bid represented a 16.4% premium over TalkTalk's most recent closing price, valuing the telco at 97 pence a share. TalkTalk rejected a 135 pence per share offer from Toscafund last year,

By UK takeover rules, Toscafund has until November 5 to make a firm offer. The fate of the bid will largely rest on the decision of TalkTalk's executive chairman and founder, Charles Dunstone, who owns a comparable 29.85% chunk of the company.

The takeover bid comes at a time of consolidation in the UK telecoms market, after O2 and Virgin Media announced their intention to merge in a May statement by their respective owners, Telefónica and Liberty Global.

There has been speculation the Toscafund bid may provoke an offer from a telecoms giant such as Vodafone. With 4.2 million users, TalkTalk, with headquarters in Salford, is Britain's fourth-largest broadband company, making it an interesting asset for telcos seeking to challenge the £31 billion tie-up between O2 and Virgin Media.

However, the UK Competition and Markets Authority has signaled its desire to investigate the O2-Virgin Media tie-up. This suggests regulators may have the final word about just how far telco consolidation goes.

The low share price of European telecoms companies in 2020 has also seen private equity firms running the rule over providers like BT and the Netherlands' KPN. BT shares have dropped 41% since January, and TalkTalk's by a third.

The low cost has also led Hughes to believe the sell-off in telco stocks has gone too far, and there are now bargains to be had.

There are other reasons TalkTalk may be selling at a discount.

Ofcom's report on customer satisfaction found TalkTalk had the UK's lowest satisfaction scores out of home broadband providers, and its customers were less likely than average to recommend TalkTalk to a friend.

Only 44% of TalkTalk customers who made a complaint in 2018 or 2019 were satisfied by the response, which was the lowest score of any UK provider.

TalkTalk has seen three-quarters of its share price erode since the first half of 2015. In October 2015, the personal information of more than 150,000 of its customers was stolen in a data breach, including sensitive financial data for 15,000 people. It received a record £400,000 fine as a result, with its then chief executive, Dido Harding, stepping down shortly after. Harding is now head of the UK's COVID-19 track-and-trace program.

At the same time, TalkTalk's niche at the low end of the UK telecoms market may make it a beneficiary of an economic downturn after the coronavirus pandemic and Brexit.

Originally founded in 2003 as a subsidiary of Carphone Warehouse, it became a standalone company in 2010. It is listed on the London Stock Exchange and a component of the FTSE250 index. It mainly uses BT's infrastructure to sell broadband.

If Hughes goes through with the offer in November, then there may be other acquisitions to follow.

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— Pádraig Belton, contributing editor, Light Reading

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