How BT’s TalkTalk swoop left broadband rivals fuming
Rescue deal will boost BT’s market leadership at a time when regulators are trying to encourage competition
Five years ago, UK communications watchdog Ofcom established a clear goal: end BT’s dominance of the country’s broadband market.
Its regulatory overhaul aimed to generate “sustainable competition” by making it financially viable for dozens of “altnets” to build rival fibre broadband networks to BT’s Openreach. The move worked: over £31bn was raised by BT’s competitors, which now cover almost 20mn homes with full-fibre broadband.
Yet last week the minister overseeing Ofcom invoked powers giving her the ability to approve a deal that will cement BT’s market leadership.
With TalkTalk on the verge of collapse, BT swooped in to acquire its smaller rival’s operations via a pre-pack administration that will see it pick up a business serving 2.5mn customers, shorn of its roughly £1.5bn debts.
Lisa Nandy, Secretary of State for Digital, Culture, Media and Sport, invoked an emergency protocol enabling her to override antitrust concerns on the basis that disruption to TalkTalk’s services posed a “genuine risk to life and public services — including to hospitals, schools and emergency care”.
The move was met with fury from BT’s biggest competitor: it came just three days after the UK’s Competition and Markets Authority said it was minded to block a separate attempt to consolidate the intensely competitive broadband market.
The watchdog warned that the proposed acquisition of the UK’s fourth-largest wholesale provider Netomnia by Nexfibre, a broadband operator backed by Virgin Media O2’s shareholders, could substantially reduce competition in the wholesale market.
“We find ourselves in a perverse situation where the logical acquisition of a sub-scale “altnet” . . . is potentially halted, yet a deal by the dominant incumbent to buy one of its biggest competitors . . . may get waved through without a sniff of serious scrutiny,” said Virgin Media O2 chief executive Lutz Schüler.
A Netomnia-Nexfibre combination would create an 8mn-home fibre network. BT’s Openreach serves nearly 25mn homes.
The decisions from Nandy and the CMA have sparked debate over the rule book for mergers and what the exit route is for the dozens of investors who have backed BT’s sub-scale rivals — many of which are now facing a cash crunch.
The cost of building out networks has left the lossmaking “altnets” saddled with over £9bn in net debt, according to calculations by Enders Analysis. Some providers, such as London’s G.Network, have fallen into administration, while lenders to others have been forced to write down the value of their debts.
The CMA’s signal that it may block Nexfibre’s attempt to buy Netomnia — the sort of consolidation that many investors had been banking on — has sent shivers through the sector. The move raises questions over whether the watchdog’s stance will ultimately delay rivals from creating the sort of competition for Openreach that Ofcom set out to achieve.
“The UK needs some bigger scaled competitors to Openreach and it needs additional investment to expand fibre [networks] . . . the CMA decision makes those two necessary outcomes much more challenging to achieve,” said one UK broadband boss.
Deutsche Bank analyst Robert Grindle said the two decisions were “materially at odds with each other” and that allowing the BT-TalkTalk deal runs “counter to the policy to develop sustainable UK fixed-line competition, which has so far led to substantial investment in fibre to the benefit of consumers [and] businesses.”
However, others believe the two potential takeovers are fundamentally different. That is partly because the TalkTalk takeover affects the retail market, whereas the Netomnia deal largely impacts on wholesale — the part of the market that was the original target of Ofcom’s regulatory overhaul in 2021.
“The crucial difference between these deals is that TalkTalk is a proven failed-firm situation, with it having been publicly for sale for at least the past four years but with no credible buyer,” said Karen Egan, head of telecoms at Enders Analysis.
In the case of Netomnia, Egan added, the CMA found that smaller player CityFibre would be a credible alternative buyer for the company.
An Ofcom spokesperson said they “disagreed that the events of the past few days” had undermined its approach to network competition, adding that its regulation had “supercharged competition and investment” in the industry.
“These are two very different transactions, being carried out in materially different circumstances,” they added.
A government spokesperson said that Nandy’s intervention “will ensure wider risks to the public are considered alongside competition, which is being assessed by the CMA”.
Ofcom has so far declined to share its definition of “sustainable competition”. But its chair, Sir Ian Cheshire, recently hinted at what this could be, telling the FT in July he envisaged the UK ending up with “three big [broadband] networks”.
But after this month’s regulatory interventions, some are questioning whether this goal is ultimately feasible.
“The presence of three competing networks in every postcode area feels more like a pipe dream than reality,” said Matt Howett, founder of Assembly Research.