Carphone Warehouse / AOL UK

Carphone Warehouse and Time Warner Inc. have reached agreement for Carphone Warehouse to acquire AOL's Internet access business in the UK for a cash consideration of GBP 370m (USD 688m) funded via an extension of existing debt facilities. Completion is subject to EU competition authority clearance and is expected to take place by 31 December 2006.

Under the agreement, Carphone Warehouse will acquire AOL's Internet access customer base in the UK as well as the supporting management and infrastructure (the 'Access' business). For its part, AOL will provide co-branded portal, content and other audience services and will manage the online advertising sales for Carphone Warehouse's combined broadband customer base through a revenue-sharing agreement.

AOL is one of the largest Internet service providers in the UK, with approximately 2.1m ISP customers. On completion, it is anticipated that this will comprise 1.5m broadband customers and 0.6m dial-up customers. In the year to December 2005, the assets to be acquired generated revenues of GBP 442.1m and an operating profit of GBP 14.1m. Gross assets at December 2005 were GBP 77.9m.

Since 2003, Carphone Warehouse has been building a significant presence in the UK residential telecoms market. Through organic growth and acquisition, it has grown to a base of 2.7m voice customers in under four years, giving it approximately 11% of the residential calls market. In April 2006, Carphone Warehouse launched a major new initiative, offering free broadband to its voice customers, and has attracted 625,000 applications for this service over the last six months.

The acquisition of the Access business will give Carphone Warehouse an enlarged broadband customer base of approximately 2m customers, making it the third largest broadband provider in the UK. Over time, the additional scale is likely to create significant operating efficiencies in relation to network infrastructure and marketing costs. In addition, the commercial agreement in relation to the Audience business provides Carphone Warehouse with a ready-made platform via which it can generate material incremental value from its large and growing customer base.

The management time and investment cost involved in replicating the Audience business model would be significant, so the structure of the deal allows Carphone Warehouse to accelerate its plans without the requirement to build further internal resource.

For Time Warner and AOL, this transaction marks an important step in positioning AOL's audience business to take further advantage of the rapid growth in online advertising - in keeping with AOL's overall worldwide strategy. In addition to exiting its Internet access businesses in Germany, France and the UK, AOL will now have a stronger platform for providing portal, content and other audience services, on a stand-alone as well as a co-branded basis, and managing online advertising sales.

The total cash consideration is GBP 370m, of which GBP 250m will be paid on completion and the balance paid in three instalments over the following 18 months. The consideration is being funded by an extension of existing bank facilities. The transaction is due to complete by 31 December 2006 and is subject to EU competition authority clearance. At this stage it is anticipated that the acquisition will increase current year pre-tax profits by approximately GBP 10m (subject to completion by 31 December 2006), and next year's pre-tax profits by GBP 30-40m.

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