Broadband Fuels Euro Action

Like the FIFA World Cup, AOL (UK) Ltd. attracted furious speculation over the weekend over who'll win it.

And while Brazil, Argentina, and England (now pronounced Inger-land by the proletariat) are still the favorites to lift the football trophy, BT Group plc (NYSE: BT; London: BTA) and Sky have been pegged as the leading contenders to buy the AOL unit's broadband business. (See AOL Mulls Euro Broadband Exit.)

Weekend media speculation puts BT and BSkyB at the front of a pack that might, according to various reports, also include Carphone Warehouse Group plc (London: CPW), Vodafone Group plc (NYSE: VOD), Telefónica Europe plc (O2) , and Orange UK . (See FT Turns Orange.)

The potential price for AOL's business, which has more than 1.2 million broadband customers and 900,000 dial-up users, is expected to be between £600 million and £700 million (US$1.1 billion and $1.29 billion), though some reports suggest AOL is looking for £1 billion ($1.84 billion). Although AOL isn't commenting, it's believed that initial bids need to be made by the end of today.

BT is regarded as a potential bidder because it needs to improve its position in the retail broadband market. And it's a move that would make sense, reckon analysts at Lehman Brothers . In a research note this morning the firm said it has been advocating an acquisition of DSL subscribers by BT for some time "to improve it's [sic] retail DSL market share, which is amongst the lowest of the European incumbent operators… We believe regulatory issues would not be insurmountable."

Should BT take the plunge and win the bidding war, AOL's broadband base would bump BT's share of the U.K.'s DSL market from about 34 percent (2.9 million of a total 7.9 million at end of March) to about 50 percent. "We think this would likely be positive for BT ahead of the launch of its Vision (IPTV) service in the autumn, but note that management has been somewhat unenthusiastic about going the inorganic route in the past," added the Lehman team. (See BT Unveils IPTV Service.)

BSkyB, meanwhile, is seen as a potential buyer as it looks to add to last year's acquisition of Easynet. That move gave it plenty of network infrastructure but not too many DSL subscribers, which it will need to cross-sell its TV services and develop hybrid satellite/fixed-line IPTV services. (See Murdoch's Sky Takes on BT.)

The other names in the frame are seen as less likely bidders at present, but all could benefit from such an acquisition. The Carphone Warehouse shook up the U.K. broadband market with its clever marketing gimmick of "free broadband" in April, and in less than two months has signed up a staggering 340,000 customers, according to its quarterly report issued last week. (See Free Broadband Comes to the UK.)

It was that move that prompted AOL to look for the U.K.'s DSL exit door and pushed the management at Cable and Wireless plc (NYSE: CWP) into curbing the residential strategy of its broadband business, Bulldog Communications Ltd. (See C&W Neuters Bulldog.)

Carphone might look at AOL UK's assets, as its subscribers would ease its marketing requirements and give it an installed base of DSLAMs and unbundled lines.

Wireless operators Vodafone and O2 are potential bidders as they look for a way to add fixed-line broadband to their mobile services and match the bundling might of Orange and ntl group ltd. (Nasdaq: NTLI), which has added Virgin Mobile Telecoms Ltd. to its cable broadband and TV assets. (See Vodafone Unveils Convergence Plans, O2 Confirms DSL Aspirations, and NTL Takes Virgin.)

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