Lombard can only imagine how a fireside chat between Martin Hughes, founder of hedgie Toscafund, and Sir Charles Dunstone, founder of TalkTalk, might have begun. “We need to talk about TalkTalk. We both hold 30 per cent of the shares and they’re going nowhere. Let’s put ourselves out of our misery.”
In fact, the telecoms group’s shares are worse than nowhere. Five years ago, TalkTalk’s shares were trading above 250p. Last year Toscafund put in an offer of 135p a share to take it private, which was rebuffed. Now Toscafund is tentatively offering 97p to take the company off the stock market, conditional on Sir Charles taking shares in an unlisted entity.
At least that allows Sir Charles to grieve in private.
TalkTalk ought to have had a good pandemic with phone and internet usage soaring. True, few telecoms businesses have fared well. Prices across the sector are down on average about a fifth over the year. But TalkTalk’s shares are down nearly a quarter since January.
Revenues in the year to the end of March were already stalling before lockdown. A big jump in working capital hit cash flow. Analysts hope for a reversal in 2021, but TalkTalk is still a long way from its target to bring net debt down to twice ebitda. That is in spite of selling off FibreNation in York to Goldman Sachs-backed CityFibre for about £206m at the start of the year.
The company says the average revenue per user is rising and the churn rate is lower than it has ever been. But there have been too many false starts and TalkTalk remains a price-taking underdog offering budget pay TV and broadband in a market full of megatons arming for a full-fibre future. TalkTalk doesn’t offer much to potential buyers except 4m capricious customers. It needs a plan.
Martin Hughes has got one presumably. It might not be so different from the one he formulated as part of the consortium that took Daisy Group, another UK telecoms business, private five years ago. Then the idea was to mop up a rival, bring in new management and float it.
Shareholders may fear they will miss out on a possible upside. But Fomo is not a good reason for holding out. Toscafund has broached a £1.1bn offer for TalkTalk’s shares or £2bn including debt. They can hope to inch the price up a little. But 97p is about seven times ebitda forecast for next year and more than 15 times the group’s operating free cash flow. That’s above the sector average and must be worth talktalking about.
Hargreaves’ Brexit buffer
Brexit bothers investors and periodically slows down the whole Hargreaves Lansdown moneymaking machine, writes Cat Rutter Pooley. Not noticeably this quarter though, even as the next Brexit deadline looms.
In the three months to September, HL attracted 31,000 net new customers, it said on Thursday, despite both Brexit and Covid-19 giving investors the collywobbles. This time last year when Brexit trouble bubbled it only brought in 17,000 on a comparative basis.
Many will be day traders lured by the stock market machinations since March. Elevated trading volumes helped lift HL’s revenues above analysts’ expectations. The new clients are potentially less lucrative than others on Hargreaves platform.
They did not bring as much money with them per head as those who joined a year ago, and won’t necessarily stick around once markets quieten. But flighty as day traders may be, they are helpful at a time when uncertainty is building and interest rates are at rock bottom.
Many UK equity investors are already choosing to wait out the current bout of turbulence. UK shares have proved unpopular in recent months. The FTSE 100 has been slower than global peers to recover from March’s plunge. Data from the Investment Association show net retail outflows from UK funds of £748m in August and £912m in July.
If clients build up cash balances that is bad for HL, since rock-bottom interest rates mean it earns measly margins on the pooled money placed with banks. Those margins have historically accounted for a decent chunk of overall profits, says Shore Capital analyst Paul McGinnis: about 27 per cent in the year to June and 24 per cent in the year before that.
But rates have fallen significantly since April as central banks loosened purse strings. The headwind to profits from lower rates could be about £70m if extrapolated over the course of a year, Mr McGinnis reckoned in August.
HL hopes it can convert its new stockbroking clients to other assets, making them as sticky as the rest of its customer base. It does not matter too much if it can’t. They are nice to have for now as a Brexit buffer.
Even after Brexit is done and dusted, Hargreaves will continue to reap the benefits of the shift from defined benefit to defined contribution schemes and an ageing population with money to invest. It is as close to a perpetual motion machine as one is likely to find on the stock market.
Hargreaves Lansdown: Cat.email@example.com
Get alerts on TalkTalk Telecom Group PLC when a new story is published