TalkTalk: reconnecting
Investors are excited by Charles Dunstone’s return but the outlook is tough
Dido, Queen of Carthage, leapt on a bonfire after her relationship with Roman forefather Aeneas ended. A different flame is being rekindled by Baroness Dido Harding’s impending separation from TalkTalk, where she is chief executive: shareholders’ passion for Sir Charles Dunstone, who becomes executive chairman.
Entrepreneurs usually jump back into companies they have founded for one reason: to re-energise them. A hop in the shares showed that investors believe Sir Charles can do just that at the broadband group.
Despite the high-toned titles of bosses, TalkTalk occupies crowded territory at the value end of the UK telecoms industry. Here, it is exposed to incursions from the likes of BT Group and Sky. Price competition is fierce and customer churn is high. Earnings before interest, tax, depreciation and amortisation have bounced between £200m and £300m since 2010, according to S&P Global.
Analysts at Jefferies forecast a figure of £300m in the year to March, too. That compares with £260m last time, when TalkTalk bore heavy — some would say unnecessary — expenses for a small data breach. The business has since rejigged contracts in a bid to hold on to more of its 4m customers.
Price investment will have to be iterative. TalkTalk has little scope to finance this with debt. Bond covenants caps leverage at three times. The likely year-end figure is 2.5 times, at which level free cash flow may be negligible.
Lower dividends may therefore be on Sir Charles’s agenda when he takes control in May. Usually, that would be bad news. However, shares that had fallen 38 per cent since May rose 7 per cent on Wednesday because investors admire Sir Charles’s ability. The merger of retailers Carphone Warehouse and Dixons, in which he was involved, was a notable success.
The collapse of two competitors helped. That boost is unlikely to assist TalkTalk. Instead, Sir Charles and new chief executive Tristia Harrison will have to grind out improvements in small, hard-won increments. As Aeneas may have remarked as he turned his back on Carthage, Rome is not built in a day.