BT Group plc (LSE:BT.A) is plotting a rescue of TalkTalk (TalkTalk Telecom Group Limited) as an escalating cash crisis threatens disruption in the broadband market. The former state monopoly is in the early stages of exploring a takeover of TalkTalk and its 3.2 million customers, according to City sources. BT is considering a bid for Britain's fourth-largest broadband provider amid fears that its own business could be damaged by the tightening squeeze on TalkTalk's f nances.
TalkTalk, which is led by Sir Charles Dunstone, its founder, narrowly avoided collapse last year. Sir Charles and other shareholders were forced to pump £235 million into the company to stave of the threat of insolvency. That deal provided some breathing space but TalkTalk remained saddled with £1.2 billion of costly debt.
The further deterioration of its business, as customers defect to rival providers, has put it back under pressure. TalkTalk lost 400,000 customers last year. It ranked bottom of Ofcom's latest customer service rankings last month with a satisfaction score of 77pc.
One of its listed bonds is now trading at 44p, suggesting uncertainty in the market over whether the company will be able to repay its debts. It was trading at 78p in the pound in late April. TalkTalk's challenges have begun to take a toll on BT's Openreach network division, which hosts the vast majority of TalkTalk's customers.
Many of those switching away are opting for new challenger brands which have invested in their own fbre-optic networks rather than rented capacity from Openreach. Openreach lost almost a quarter of a million broadband customers in the first three months of the year, in part as a result of TalkTalk's decline. TalkTalk has also fallen behind on payments and Openreach has reportedly threatened to block the company from putting new customers on its network.
Insiders stressed that internal discussions at BT were at an early stage and that a takeover bid had not yet been discussed with TalkTalk. The combined company would hold a market share of roughly 36pc, strengthening its hand against the fbre-optic challenger and expanding its Plusnet brand, which competes with TalkTalk at the value end of the market. However, it would be likely to attract protests from rivals and scrutiny from competition regulators given BT holds a dominant position in the broadband market.
CityFibre, the largest fbre-optic challenger, hosts around 150,000 TalkTalk customers on its network. A lengthy investigation by the Competition and Markets Authority would raise the risk of further customer losses at TalkTalk that would dilute the appeal of a merger, City sources cautioned. BT executives are said to be hopeful of receiving support from Ofcom, which would be closely involved in a competition investigation.
The telecoms regulator has been monitoring TalkTalk closely amid concern that a collapse could leave millions of customers in the lurch. Virgin Media O2 has also previously weighed up an approach for TalkTalk as it looks to build up its own wholesale broadband business. BT and TalkTalk declined to comment.
