TalkTalk bidder asks Openreach to waive UK wholesale broadband charges UPDATE
The lead bidder, Epiris, for part of the debt-ridden TalkTalk Group, which is now in the final stage of its turbulent efforts to dispose of both their consumer broadband ISP business and the PXC (PlatformX Communications) wholesale business, has reportedly asked network supplier Openreach (BT) to waive several months of payments to support a rescue deal.
Just to recap. Private equity firm Epiris have been attempting to secure a deal for TalkTalk’s wholesale-focused PXC business since Octopus Investments retreated from an earlier bid. Epiris is also in the middle of a separate £1bn+ takeover bid for London-listed business ISP Gamma Communications (here), which if successful could potentially share substantial financial synergies with PXC.
Meanwhile the TalkTalk Group, which is being advised by PJT Partners, are understood to have appointed Alvarez & Marsal (A&M) to help dispose of both their consumer and wholesale businesses using a pre-pack administration process. TalkTalk’s consumer business is also strongly linked to PXC’s wholesale products, thus any deal for one side of the business or the other would need a complementary agreement.
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However, the focus today is on Epiris’ bid for PXC, which is said by Sky News to be facing a challenge due to PXC’s now imminent requirement for paying a significant bill to Openreach for provision of their UK network services (broadband, Ethernet etc.) to the TalkTalk Group. Epiris is now understood to have asked the BT Group to “waive or write off several months of payments” from PXC to Openreach – said to be worth over £100m – in order to allow their rescue deal to complete.
Network access provider Openreach would naturally be well within their rights to say no, although much will depend upon the structure of what Epiris has proposed. Not to mention that Openreach will need to consider how much it might lose were the Group to collapse early next week. Ultimately none of this is Openreach’s fault and they’re being somewhat asked to carry the can for another company’s poor management.
On top of this there are likely to be some political pressures, which stem from the fact that PXC are a key supplier to thousands of vulnerable customers as well as hospitals, doctors’ surgeries and other areas of Critical National Infrastructure (CNI). But the reality here is that, even if the Group did collapse, a solution is almost certain to be found that keeps c.1.6 million customers connected. The question is more over the survival of everything else.
As for TalkTalk’s consumer business, the expectation is currently still that existing investor Ares Management will take ownership of the business, although Vodafone and Opus Broadband are understood to still be engaged in talks. But as mentioned earlier, the outcome of that is very much linked to PXC and both share the same problem with payments to Openreach.
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The next few hours or days will be pivotal.
UPDATE 4:39pm
The FT have just reported that BT has now opened talks with the UK government over the possibility of a takeover bid for TalkTalk, which is necessary because BT are by far the market’s largest retail ISP and such a deal might normally raise an in-depth antitrust review. In fact, asking Openreach to waive payments, as mentioned above, could potentially also raise some legal issues were the operator to agree.
As previously reported, the worst-case scenario for the TalkTalk Group would be a collapse, which might otherwise trigger a tedious Supplier of Last Resort (SoLR) process; not the first time such a thing has been discussed (here). The OTA has previously sketched out a limited SoLR process to help protect customers in the event of a big failure, but it’s largely untested at this scale and not enforced.
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Previous reports have suggested that BT could potentially take on TalkTalk’s base, but rescuing upwards of 1.5-1.7 million customers could create resource problems for even a provider of BT’s scale. This is before we consider the huge complexity of TalkTalk’s wider arrangements with alternative networks (BT doesn’t use altnets, only Openreach), which would create all sorts of problems with customer migrations and competitive wholesale agreements.
In the meantime, BT is allegedly said to be working with antitrust lawyers at Clifford Chance on the possible TalkTalk deal.
Mark is a professional technology writer, IT consultant and computer engineer from Dorset (England), he also founded ISPreview in 1999 and enjoys analysing the latest telecoms and broadband developments. Find me on X (Twitter), Mastodon, Facebook, BlueSky, Threads.net and Linkedin.
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It’ll be interesting to see if Openreach agree to this.
Sets the precedent for others not to pay their bills.
Personally I think it’s wholly wrong if Openreach pick up the tab for years of TalkTalk mismanagement giving them an advantage over others who do in fact pay their bills.
Let’s see how this plays out I guess…
I think that the parent board would have to agree to a write-off of this magnitude, since it would almost certainly require formal shareholder/market disclosure.
Any business other than BT (due to the regulatory framework it operates under) would likely only agree to a waiver/write-off of payments in exchange for an equity stake in the new combined operation. That stake would be quite sizable given the scale of the requested write-off in comparison to the price being offered for the existing business.
I wonder how much it would cost BT plc, if BT Wholesale and BT Operate had to pick up the pieces, if PXE fell into administration without a pre-pack?
Would it be greater than the 100+ million of grace that Epiris are requesting?
Sorry, senior moment, I meant BT Networks. BT Operate ceased to exist a long time ago of course.
If Openreach just let TalkTalk and PXC collapse they will not loose many customers as they’ll all likely move to a new provider also using Openreach.
Openreach will benefit from migration fees, new minimum contract terms and likely a higher price per line. BT Wholesale will gain a lot of new customers, so will Vodafone and Sky.
But can any of them cope with processing the amount of migrations, new router shipments etc? Defiantly not.
Leased line could be a much bigger problem. Especially as this would require much more planning. Business may have to sign new 3 year contracts with new providers. I doubt there is a simple process for switching provider of a leased line compared to switching SOGEA/FTTP.
Whilst Openreach may have regulatory and operational responsibilities to help maintain service continuity they (or BT) surely they would not be liable for other PXE responsibilities.
The physical Openreach network would continue and they can’t pull the plug, which is why they are in this situation being owned millions.
Government and Ofcom would likely be heavily involved because PXC service includes critical infrastructure and public-sector organisations. Someone would have to take over and be rewarded with funding or promise of future revenue which could include BT.
What surprises me, with the apparent importance of PXE, is that their customers have not sought contingency arrangements. It all appears to be late in the day.
@ Tim:
IIRC, the terms of the Operator of Last Resort process require the OLR to honour existing contracts for up to two years.
It also occurs to me that since TalkTalk use the altnets as well it might be in Openreach’s interest to let TalkTalk go under as it would possibly be less harmful to it than the altnets.
I don’t see how this is good for OR. If TT doesn’t find a buyer, then it won’t be able to pay either. But if they do, they are liable for the fees. So it sounds like they are already asking OR to accept the worst outcome, but in advance.
I don’t think TT going bust is a big risk for OR, I’d assume most of the TT customers would stay on-net, just with a different ISP.
The bidders for the businesses exist; they are likely just playing hardball now by taking advantage of the circumstances to minimise the acquisition costs, which is fair enough. However, that does not mean that BT and other providers on the hook have to just accept what is being proposed.
EoI will likely make this impossible.
https://www.bt.com/bt-plc/assets/documents/about-bt/policy-and-regulation/download-centre/guidance-notes/guidance-notes-equivalence-of-inputs-and-equal-treatment.pdf
£100m write-off, absolutely not. Other Openreach customers would be rightly asking where their nine-figure freebie is.
Openreach caught between the devil and the deep blue sea, here. Either give in to Epiris and write off the debt (which will open the door to everyone else taking the mick in the future), or stick to their guns and potentially see the wider BT Group get accused of anticompetitive behaviour if it’s the straw that breaks the TalkTalk camel’s back.
Ultimately Openreach provided the service, and they deserve to be paid. Let TT sort themselves out afterwards.
It’s a balancing act. Openreach want as much money owed as possible, but if you ask for all of it and TalkTalk get appointed administrators, Openreach could get a lot less!
But it sets a precedent, you might lose more now but it would probably cost even more down the road. And if I were say Sky I would feel fully justified in asking for 3 months free as well!
If what is left of TalkTalk fell into administration, the creditors, such as BT, would likely recover less than a couple of pence in the Pound, if that. Any such administration process is going to have a wide impact on the sector.
I would just let the group go bust. The customers will be saved and then PXC can be broken up into the useful bits. The lights won’t go off immediately.
It is time for BT to play hardball with both the bidders and Ofcom. If it does not take a stand now, who knows what costs will be imposed on it by the next set of failures.
Sets too much of a precedent & quite frankly if I was any other ISP on Openreach’s network I would feel perfectly justified in asking for 3 months for free.
Legally the cleanest option for Openreach would be to let/force an administration (prepack or normal) with no prior agreement for the debt in place, and take what they can get in the administration process.
That way no-one else can claim that any special favours have occurred that would distort competition.
Financially may not be much difference for any of the options offered.
Operationally an administration would be a headache to organise a transfer of control. OfCom should to appoint an “operator of last resort” to operate TT/PXC and create an orderly transition of customers in tranches on the open market (phased tranches notices of termination to customers) or in bulk (whole or tranches) to a new supplier with some contract terms protected (c.f. what has needed to happen with failed energy suppliers).
The creditors are likely to be wiped out if the businesses fall into administration, while the lenders would likely take a sizable hit.
There’s currently no legal framework for Ofcom to appoint an “Operator of last resort” unfortunately.
Hopefully the TalkTalk “never ending car crash” will prompt ministers to formulate a SoLR & Special Administration process for the telecoms/ISP sector for Ofcom to use in future.
It wasn’t until after the first energy supplier insolvency that Ofgem got a SoLR framework; once again demonstrating that HMG is reactive and not proactive.
The only power they have presently is that of persuasion, which might be enough of course.
@Not quite so Bizzie Lizzie:
The sector has agreed to the SOLR Process.
@Far2329Light
Hello Far2329Light,
I said that there is no LEGAL (i.e. statutory) framework, which is unfortunately still true.
The OTA Supplier Of Last Resort Industry Process V4.1 8 describes itself as a “best efforts” voluntary agreement.
Ofcom cannot as yet direct any CP/ISP to be a SoLR.
I’m not saying that any ISP would turn down the prospect of a “shed-load” of new subscribers, however they could, without requiring any justification, and there would be nothing that Ofcom or HMG could do about it, apart from passing retrospective legislation, which would not be a simple process.
All the best,
Liz
Any Operator of Last resort arrangement would be rather complicated given the distribution of EE’s customers across a number of network providers.
Rather than a straight acquisition of retail customers by the OLR supplier, the business might have to be run as an independent entity. That would be costly, with either Ofcom, the Government or the broadband sector as a whole might have to step in to fund such an operation.
Correction: TalkTalk customers, not EE.
If they went into Administration, without a pre-pack, my hunch is that there would be emergency legislation to put it into Special Administration.
Similar to the Bulb Energy insolvency, except reactive rather than proactive of course.
@Not quite so Bizzie Lizzie:
There is no need, as far as I am aware, for such an arrangement. There is adequate provision for that eventuality, though it would not save the creditors or the lenders.
Now that BT plc have poked their corporate head above the parapet, then I would now agree with you.
HMG would then have to hold its nose and waive competition concerns accepting any risk of legal challenge of course.
Whilst OR are the largest network TT use there are other network providers in the mix as well, especially CityFibre.
TT is unlike a lot of other providers, in that it is the amalgamation of several former companies and bases. They have had a share in TAL which buys up outgoing bases from ISP’s and them moves them to other wholesalers at cheaper prices to bank a profit. Though that was disposed of recently. What will likely happen is that but in reverse.
TT isn’t just having issues paying OR, this is impacting more companies they have relationships with VF, VMO2, CF, Sky etc.
Its a spiders web of liabilities. If an operator of last resort is appointed, the remaining bases will continue as a going concern and those customers TT acquired (e.g. for SSE) will likely be migrated across to the reseller’s own ISP. If they’re on Cityfibre it gets a bit more complicated there and also with community fibre too.
Whatever the outcome for this, it won’t be clean, I wouldn’t be surprised if any creditors push for a winding up order to settle outstanding liabilities.
What a joke. Why should Openreach take the financial hit for years of mismanagement?
Absolutely. The hit should be taken by TTG, thus reflected in the offer price for PXC by any buyer. The buyer will also need Openreach onside as will be by far their biggest supplier if successful – I’d ask for a substantial deposit to set up any trading relationship, and would consider asking for payment in advance rather than on 30 day type terms initially.
I think Openreach should stick to their guns and not let Talktalk off the hook, or delay their payments because if they do, Openreach loss money but it sets a precedent to the rest of the market. If Talktalk is then sold, I doubt any potential buyer would want to honour the debt to Openreach either so either way here, Openreach lose.
If they don’t give in to Talktalk they will likely still lose money, but not as much as I’m sure they’ll get something off the administrators.
Personally, I’m glad to see their customer numbers dropping as for too long, customers have seemingly been willing to put up with poor customer service.
A retired M&A lawyer (who is also my stinking rich tight-arse cousin’s husband – hope he doesn’t see this comment!) just told me that Openreach offering Epiris a £100+ million waiver of wholesale charges, would fall foul of the Communications Act 2003.
Quote: “Openreach would be poking a legal hornets’ nest.”
Mike…Is that you?
@Anonymous
No, my name’s not “Mike”.
It wasn’t him that grassed on you.
Sorry to hear that your missus is just like my stuck-up cousin.
If TT did collapse and customers had to move, I suppose there must be some way around the Fibre-only restrictions that exist in some areas? For example I have a number of VDSL lines that are in fibre priority areas but where OR are unable or unwilling to service the property. I have tried to migrate between providers and they can’t/won’t because OR won’t accept copper orders in the area.
The stop sell doesn’t apply against addresses that Openreach cannot provide with FTTP, either their data should reflect this (checker should say ADSL/VDSL available) or a CP can use a manual exemption process.
I would expect that in the circumstances Openreach would permit like for like migrations of VDSL lines by exception, and there’ll have to be similar leniency for any remaining analogue voice services (eg moving them to BT PDPL or Openreach EVAC or to any other LLU operator willing to take them)
Sounds like you’d be forced into joining the 21st Century whether you wanted to or not.
The update regarding BT talks suggests the other potential deals are stalling or dead.
The complexity of this is mind boggling…
Short term BT would need to inject cash to keep them trading as a SoLR but also keep their systems and network operating including the various billing platforms.
Stage one would be to immediately divest any alt-net tails to alternate suppliers – either the alt-nets themselves or where they are wholesale only to a reseller who already uses the given network. BT will not be allowed to move tails off alt-nets to Openreach infrastructure for obvious anti-competitive reasons.
TTc – potentially the easiest technically but the resource required for migrations and number ports will be huge. Done via OTS and moved I guess to EE or the Plusnet brands if VoIP is not required. Reportedly lots of vulnerable customers in this cohort who may be reluctant to change.
TTB – while TTB is a separate entity, the majority of their revenues will be derived from PXC as the supplier. So TTB will need to decide where to move their customer connections to. Will they get the same type of commercials?
PXC Ethernet – including the connections acquired via Virtual1, they control about 25% of the market. As there is no migration process for Ethernet, new orders will need to be placed but will BT Wholesale or others using OR EAD have the available capacity? Then much of this business will be via several hundred resellers – while BT may want some if the larger ones directly, the smaller ones or those less credit worthy may be directed to other tier 2 wholesalers.
PXC BB – again will be via hundreds of resellers and I include MPF lines here. Another major migration job and those sold into business customers will want static IP’s retained adding an extra planning stage.
Virtual1 also sold hosting and some security services, and PXC offered Zoom services so you start to get into bits and pieces.
I’m sure there are many more moving parts but this will keep the industry on its toes!
It has been reported that BT is seeking to acquire TalkTalk as a going concern.
That would address the immediate problems and also allow time to plan for the breakup of the operations.
BT should play hardball with Ofcom and pick up the TalkTalk punters on the cheap rather than sucking up a £100Million hit on Openreach’s balance sheet to allow another player to pick up TalkTalk punters on the cheap.
Hopefully Openreach tell them to take a run and jump! TalkTalk has fell behind in the bills with them a long time ago. Also they owed Sky a fortune for the Now TV packages they were selling and didn’t pay for!. They should be let fail
Openreach can’t agree with this, even if they wanted. Have people ever heard of precedent? They would be setting the ground for anyone in some sort of financial difficulty, to wave unknown millions in line rentals.
I view it more probable BT ending up taking them over, somehow settle (hide) those unpaid line rentals under the deal and then sell on TalkTalk to someone else, rather than just “waving” the owed money.
If not BT, then a quick analysis (Google Gemini) indicates that Zen and Vodafine are best placed to handle the existing “tail” complexity of OpenReach and alt-nets.
Vodafone has an existing relationship with Community Fibre (but not the other altnets used by Talktalk), and Zen has relationships with the other altnets apparently in use by Talktalk but does not have a Community Fibre relationship.
If BT were allowed take over, then the competitive remedy is customers on altnets would have to be passed onto Vodafone, Zen (as big enough and with the right relationships in place and presumably OTS is working well for both).
New routers all round, likely, after an interim period–and availabliity/supply is a limiting factor to the transfer.
Ofcom should demand that existing social tariff contracts are honoured by new suppliers to end of contract or maybe 9 months.
Do Zen or Vodafone have the money to pay Talktalk’s creditors? Vodafone might but I would be surprised if Zen can find the money to pay Openreach, let alone the rest of the creditors. Without that money there is no business. If it is really a matter of maintaining service to customers above all else then any new owner will have to be able to lay their hands on hundred’s of millions of pounds fairly quickly. This is likely to be a game for bigger businesses than Zen whose turnover is probably about the same size as the debt they would be taking on.
If someone else takes over the business then the hard part will be making it worthwhile for them. Any business in the same industry large enough to take over TalkTalk will be large enough to prompt competition concerns about the purchase – there will be a requirement to sell off most of what they have bought in due course. Will what they are left with be enough to have made the process worthwhile for them?
The alternative is that the government sticks its hand it is pocket – something it will be desperate to avoid.
If BT “leads” the rescue then they will have to bear the bulk of the cost (already known via the unpaid bills to Openreach).
Probably fair that any customers that are passed on to other ISPs as a competitive remedy are costed at a fair but fixed “acquisition” fee (£10’s of pounds each–bearing in mind that Vodafone certainly does currently pay for quite a bit of marketing intended at customer acquisition; Zen not so much).
There honestly is a world of complexity in this because it has never happened to a wholesaler of this scale. The industry is watching as are the investors to see how it plays out. It’s sadly kind of exciting lol.
There is a couple of outcomes that envisage
– Equis make the purchase with no agreement for OR to restructure the monthly payments. (Highly unlikely, this investor knows that the OR commitment is significant enough to hinder their restructuring and resale)
– Equis secure agreement with OR to restructure payments with OFCOM approval (unlikely because Openreach has its own financial obligations to meet for shareholders, also OFCOM will take too long to sign off)
– Equis bails on the PXC purchase and they fall into insolvency, unlikely any buyer will take it because of the sheer complexity of telecoms regulations and OR payments. BT likely asked to step in because who else has a wholesale platform to support (however BT will do this on their terms they will not accept being forced to maintain TalkTalk as a separate entity, they will want to fold the brand over a few years and cannibalise the customer base into its own units
– Third party buys consumer unit and either maintains PXC relationship or migrated base off PXC on their own direct relationship with OR as that would be cheaper
– nobody buys consumer unit leaving again BT required to step in again they will demand it to be on their terms as they don’t see any reason their business and shareholders should be taking a hit for the industry’s failure to maintain a business.
Why would BT be asked instead of VM etc. it’s because BT is the National operator which has the coverage to maintain support for these customers. They also have the capex required to keep the business alive while it is restructured. The services on PXC especially as labelled as Critical National Infrastructure. The UK economy can’t handle the impact of a company taking on something of this size and failing again as it will cause too much disruption.
One things for sure , you can count on BT making the wrong decision .
Let them go bust so BT can buy them for peanuts. Openreach are not a charity. Anyway, good riddance to the staff as they head for the tip where they belong.