Carphone's BT challenge with £65m Opal buy

Carphone Warehouse is to take on BT in fixed-line communications in a move the mobile phone retailer claims could save the average household £50 a year on its phone bills.

The move is being made possible by yesterday's surprise announcement by Carphone Warehouse that it is paying £65m for Opal Telecom, a privately owned provider of fixed-line networks. From next February Carphone Warehouse will start selling residential and small business phone packages in its 460 UK shops, using Opal's fixed-line network. The mobile phone retailer will also use Opal's sales team to sell mobile phone packages to corporate customers, an area in which it has been historically weak.

However, the diversification proved unpopular in the City, which marked Carphone Warehouse shares down 12 per cent to 85p. Nick Bubb, a retail analyst, commented: "It's not the company's fault but no one [in the City] really understands Carphone Warehouse. This deal has made it worse."

Charles Dunstone, the group's chief executive defended the deal, saying it would add an additional revenue stream with low customer acquisition costs as the service could be sold to people while they were buying their mobile phones.

He said the lower prices would be made possible by easier switching technology, which means customers no longer have to dial extra numbers to access alternative networks, or install special boxes in their homes.

He added: "No one gets up in the morning and says 'right, I'm going to go down the road and get myself a cheaper carrier than BT', so we know we will have to offer lower prices." He said business calls would be about 30 per cent cheaper and residential calls 35 per cent cheaper. Calls from fixed-line phones to mobiles will be offered at particularly aggressive rates.

The £65m acquisition costs of Opal Telecom excludes earn-outs which could be worth another £18m and £25m of debt which Carphone Warehouse will take on.

Opal Telecom was set up in 1995 by telecoms entrepreneur Martin Dawes, whose 35 per cent stake will be worth £29m. It was due to float on the stock market in spring 2000 with a value of £250m but was forced to abandon its plans when the tech-bubble burst. Last year the business recorded profits of £3.2m on sales of £92.3m. It has 20,000 corporate customers. The deal is half in cash and half in new Carphone Warehouse shares.

BT seemed relaxed about the new threat. "We welcome competition," the company said.

The news overshadowed Carphone Warehouse's half-year results which showed pre-tax profits up to £12m from £9.6m.

Like-for-like revenue it in its stores was up 10 per cent. But underlying gross profits were up 4.8 per cent due to an increase in pre-pay deals as network operators raise subsidies. The proportion of higher margin subscribers has fallen to 45.7 per cent, from 55 per cent last year. The number of total connections grew by 21 per cent.

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