Jeremy Warner's Outlook: Carphone ends up a winner from AOL's attempt to reinvent itself as an internet portal

Matalan: Hargreaves comes up with dosh; Rising tax burdens: a global phenomenon
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The transformation of Carphone Warehouse from retailer of mobile phones into one of Britain's biggest telecoms brands continues apace. No wonder the shares leapt so much yesterday, brushing aside news that the cost of this year's assault on the broadband market would be £20m more than forecast.

This faintly negative announcement was upstaged by news that Carphone has won the auction for AOL's internet access business in the UK, paying some £370m. This works out at around £186 per subscriber, which is relatively cheap compared with the price that AOL has sold its continental assets for. However, there is a good reason for that. Britain is a much more competitive market, which with local loop unbundling is going through a considerable upheaval.

All the same, this looks a pretty good deal for Carphone. The effect will be to transform the company from an also-ran in broadband access - albeit one which even before the AOL deal had big ambitions in this space - to the number three in the market behind NTL and BT. Such is the momentum that the company could easily find itself occupying the number-one slot within a couple of years.

The industrial logic of what Carphone's founder and chief executive, Charles Dunstone, is doing is one thing, yet amazingly the financials also seem to work to his advantage too, making this deal a rare coincidence of strategic ambition and profitable opportunity.

The synergies Carphone gets by crunching together AOL's broadband business with its own will add £10m toprofits this year and £30m-£40m the year after. The deal is thereby immediately and powerfully earnings enhancing. What's more, the best is yet to come.

As things stand, both Carphone and AOL are forced expensively to use BT Wholesale to service many of their customers - AOL exclusively so. By May next year, Carphone should have achieved its target of "unbundling" 1,000 BT exchanges. By using its own equipment, rather than BT's, Carphone significantly reduces its costs and increases the profit that can be made out of customers.

Notwithstanding yesterday's 8 per cent rise in the share price, markets may not yet fully have factored in the potential upside. To date, Carphone's Talk Talk has been largely just that. The amount of publicity it gets is out of all proportion to the size of the business. After the AOL deal, Mr Dunstone can at last credibly claim to be one of the most powerful telecom brands in the country.

Yesterday's deal is equally significant, perhaps more so, for what it says about AOL as the boost it gives to Carphone. Hard to believe with the benefit of hindsight, but AOL was valued at an astonishing $163.4bn when it was bought by Time Warner at the height of the dot.com boom in January 2000. Bought is perhaps the wrong word, for AOL shareholders ended up with 55 per cent of the combined media goliath.

Rarely if ever has there been such a massive giveaway of value, with the sturdy old media assets of Time Warner's market-leading magazines, TV channels, movie studios and cable operations folded into the candy floss of AOL, an internet access operation whose business model was even then already dying on its feet. Heady days, which should serve as a powerful warning to apostles of the second dot.com goldrush now being acted out.

Virtually the whole of AOL's internet access business has now been flogged off, and, compared to what was paid for it, pretty thin gruel did these disposals generate too. The deal with Carphone is one of the last bits of the original operation to go. Instead, AOL is trying to reinvent itself as an advertising-funded internet portal in the Google and Yahoo! mould.

This made the company more inclined to deal with Carphone than some of the others involved in the auction. Carphone doesn't compete on content, allowing AOL to continue to have access to the customer base after it has been sold off. BT has a similar arrangement with Yahoo! for one of its broadband offerings.

AOL has been careful to frame the disposal of its access businesses on the Continent in similar terms. Carphone was prepared to do the type of deal AOL wanted; rivals, notably Sky and Orange, wanted to use the subscriber base to market their own content. Indeed, this is a potentially quite big downside of the deal to Carphone. Undisclosed revenue-sharing arrangements on content have been signed with AOL, but the content opportunity of broadband has largely been left with the original owners. Long-term, this is something Mr Dunstone might regret.

Nor would the acquisition have worked for Sky in any case. For BSkyB, broadband is being pursued much more as a way of driving and defending Sky TV subscriptions than as a separate business in its own right. Broadband comes free with certain Sky packages, so buying AOL may have ended up costing revenues rather than adding to them. Rival bidders for the business may not have been as serious as they seemed. It's not clear there was any competition at all to Carphone by the end. As a result, Mr Dunstone could perhaps have got away with paying less. Still, on balance a good deal for Carphone.

Matalan: Hargreaves comes up with dosh

A happy ending, of sorts, to the travails of Matalan. The stock market doubted that John Hargreaves, the founder, would ever be able to come up with the promised 200p a share to take the company private, but at the eleventh hour, and with a little help from Icelandic backers, he eventually managed it. In such circumstances, we'll put the threat to cut the dividend if shareholders spurned him down to a rush of blood to the head. I'm sure he never really meant it.

Rising tax burdens: a global phenomenon

Warnings from the CBI and others that the UK's rising tax burden could transform the trickle of companies leaving the country into a flood look a trifle alarmist to judge by data published yesterday by the OECD. True enough, the tax burden has been rising, but it has also been rising almost everywhere else.

Figures collated by the OECD show that tax burdens as a proportion of GDP rose last year in 17 out of 24 countries. True enough, the increase in the UK - up 1.2 points to 37.2 per cent - was one of the biggest of the 17, but, perhaps surprisingly, it wasn't as big as the United States. Among serious competitors to the UK, only in Germany is the tax burden both lower and if anything falling. I'm not sure staff at HSBC, one of the loudest complainants on this issue, would relish being relocated to Frankfurt, but hey, if it's tax that counts, that's where HSBC ought to be heading.

The common factor is that the tax burden has been rising most strongly in countries which are also experiencing the greater rates of economic growth. This suggests that the main reason for at least the most recent rises in the tax burden is fiscal drag - the phenomenon by which the threshold for tax is not increased by as much as inflation in earnings and profits. The result is that ever more income is brought into the tax net.

In Britain, fiscal drag has in fact been responsible for a much greater proportion of the increase in the tax burden than the various stealth taxes much complained about by business. Much the same phenomenon has been behind the rising tax burden in the US.

In one sense, then, both economies are victims of their own success. None the less, the greater rate of increase occurring in the US scarcely begins to close the gulf that still separates the tax burden in these two economies. Our 37.2 per cent tax burden for last year compares with just 26.8 per cent for the United States.

Now you're talking. HSBC staff might not much fancy relocating to Frankfurt, but New York would be an altogether more alluring proposition. Then again, America does have Sarbanes-Oxley, together with a foreign and homeland security policy which would make many HSBC clients desert in droves. Perhaps best just to stay put.

j.warner@independent.co.uk

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