BT's purchase of TalkTalk has been criticised as a 'stitch-up' by Virgin Media O2, which described it as having "all the characteristics of a stitch-up masked as a rescue deal in the public interest." The hurried weekend acquisition, completed via a pre-pack administration, sees the challenger brand consumed by the dominant player in the broadband market.
Political intervention and alternatives
Culture secretary Lisa Nandy gave her blessing to the deal by issuing a little-used public interest notice. For all the howls of outrage, it is hard to see what she was supposed to do differently, as alternative approaches, notably a chaotic collapse of TalkTalk without a rescue plan for customers, risked worse outcomes.
While fears of GP surgeries and hospitals being disconnected at a stroke, and thousands of vulnerable customers losing their internet connection, may have been overdone, the risk was not one ministers could take. TalkTalk had had months to find a buyer but failed to land a credible deal even when its retail division and its wholesale unit, PXC, were up for grabs separately.
TalkTalk's financial distress
Disappointed would-be buyers blame the reluctance of BT, as the critical supplier to TalkTalk, to extend financial support to a new ownership vehicle. From BT's point of view, however, another private equity backer for TalkTalk would not feel like an improvement on the last one. BT will be booking £100m as a non-payment of a debt even as it takes control.
TalkTalk, Sir Charles Dunstone's creation more than 20 years ago, has not been doing much real challenging work of late. After going through the refinancing wringer more times than is healthy, it was a financially distressed company. At the last count, borrowings were in the region of £1.5bn, a staggering sum for a loss-making business with only 1.5 million retail customers and 1 million wholesale ones.
Regulatory gaps and future test
Successive governments have been told many times by the regulator Ofcom that a "supplier of last resort" regime should be in place in the broadband market, just as it is in energy and water. The logic is simple: in extremis, there should be a way for a government-supported operation to step in to prevent sudden disconnections and look for an orderly permanent solution.
Such a regime did not exist with TalkTalk, and that glaring hole in the regulatory set-up needs to be addressed for future cases. A weekend arrangement with BT, however objectionable in theory, at least has the advantage of not drawing on a penny of public money.
The medium-term regulatory test will be to ensure BT and Openreach cannot abuse the advantage of gobbling TalkTalk. There was a theatrical public exchange of letters between the BT chief executive, Allison Kirkby, and the Ofcom boss, Dame Melanie Dawes. The former pleaded for regulatory mercy, in effect, for removing a political problem; the latter replied that applying the regulatory framework was a statutory duty.
It is anyone's guess how that will work out in practice since the wriggle-room would seem to be enormous. But the guiding principle has not changed – wholesale operators need to have access to Openreach's network on reasonable commercial terms. TalkTalk could not make it pay but that, in the end, seems primarily to be a story of its own perilous financing. Wrapping the business into BT is very far from being ideal – but it is not the worst pragmatic fudge.
