Carphone Guns for DSL Top Spot

British broadband upstart Carphone Warehouse Group plc (London: CPW) has embarked on the latest phase of its business transformation from high street shop to broadband giant with a near £1.1 billion ($2.14 billion) asset sale and plans for a major acquisition that would make it the U.K.'s leading broadband service provider.

Just one day after announcing the formation of a new company with a U.S. partner, a process that will provide Carphone with a new M&A warchest, the operator has confirmed to Light Reading that it's involved in the bidding process for Tiscali UK , but declined to confirm reports it has bid £550 million ($1.07 billion). (See Carphone, Best Buy Form Firm.)

"We are in that [Tiscali bid] process and in the running. All we can say at the moment is that we have a track record of never overpaying" for acquisitions, stated a Carphone spokesman.

BT Group plc (NYSE: BT; London: BTA) and Sky are also believed to have made offers for Tiscali: All offers are due to be considered at a Tiscali board meeting on May 12, the day before the troubled carrier announces its first quarter results. (See Bidders Circle Tiscali UK and Tiscali in Turmoil?)

If Carphone is successful in its bid to buy Tiscali, it will become the U.K.'s leading residential broadband provider, leapfrogging BT, which has 3.2 million residential DSL customers (the majority of its total 4.26 million broadband customers), and cable operator Virgin Media Inc. (Nasdaq: VMED), which has 3.78 million broadband customers (of which 3.5 million are cable modem users).

Carphone has 2.7 million DSL customers, while Tiscali has about 1.8 million: Combined, the two have a broadband subscriber base of 4.5 million. (See Carphone Updates on Q4.)

A successful acquisition of Tiscali would also thrust Carphone into the IPTV world: Tiscali already offers TV-over-broadband, but Carphone is yet to introduce telco TV services. (See Tiscali Unveils Biz Plan and Tiscali UK Unveils IPTV Offer.)

Financing the Tiscali bid will be made easier by Carphone's new partnership with existing investor Best Buy Co. Inc. (NYSE: BBY), which is investing in the British firm's new retail outlet spinoff.

Transforming the business
Carphone built its business selling mobile phones and service contracts from the U.K.'s five main mobile network operators, but has transformed itself during the past few years into a major broadband player. That transformation began with the audacious offer of "free" broadband to the British public in April 2006, and was followed by the acquisition of AOL UK's broadband business. (See Carphone Faces Broadband Hiccups, Carphone Acquires AOL UK, and Free Broadband Comes to the UK.)

Now it's revamping its corporate holdings and strategy in an attempt to exploit both sides of its current operations.

The company announced Thursday that it is forming a new company by spinning off its pan-European, 2,400-strong, nine-country retail outlet business, and selling a 50 percent stake in the new venture to U.S. retail electronics giant Best Buy for £1.088 billion ($2.14 billion). Best Buy, which claims to be the leading seller of laptops in the U.S. and Canada, will use the new company to open Best Buy electronics goods stores in Europe, starting in 2009. The joint venture's stores will sell Carphone's fixed line services in the U.K.

The two companies are already partners -- Best Buy already holds a 3 percent stake in the Carphone Warehouse Group, and will retain that holding once this new retail venture is formed, which should be around August. Best Buy's involvement in the new venture also explains the speculation earlier this year surrounding the two companies. (See Carphone Leaps on M&A Talk.)

Once the new company is formed, the Carphone Warehouse Group will own 100 percent of its broadband operations, its business services operations (Opal), and its network infrastructure, which it is building out to cope with the rise in data traffic. (See Brits Build Backbone With Infinera .)

Carphone intends to use the proceeds from Best Buy's investment to pay off some debt, invest in its fixed network, and "invest in new growth opportunities" -- such as Tiscali.

Carphone's investors aren't keen on the move, however. The British firm's share price, having closed Wednesday at 299.25 pence on the London Stock Exchange , fell 10.25 pence, 3.4 percent, to 289 pence Thursday, and fell a further 19.25 pence, nearly 6.7 percent, to 269.75 pence by Friday lunchtime in London.

— Ray Le Maistre, International News Editor, Light Reading

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