BT's acquisition of TalkTalk via pre-pack administration sparks debate over regulatory failure and market concentration

“All the characteristics of a stitch-up masked as a rescue deal in the public interest,” thundered Virgin Media O2. It’s not an unreasonable view of BT’s hurried weekend acquisition of TalkTalk. Once upon a time, TalkTalk was seen as a plucky upstart performing the useful role of irritant to BT’s giant Openreach broadband operation. Now the challenger is being consumed by the dominant player via a pre-pack administration that minimises short-term political headaches.

Here’s the problem, though, with the cosy stitch-up thesis. For all the howls of outrage, it’s hard to see what the culture secretary, Lisa Nandy, who gave her blessing by issuing a little-used public interest notice, was supposed to do differently. Alternative approaches, notably a chaotic collapse of TalkTalk without a rescue plan for the customers, risked worse outcomes.

OK, perhaps the worst fears of GP surgeries and hospitals being disconnected at a stroke, and thousands of vulnerable customers losing their internet connection, were overdone. But, in Nandy’s shoes, you probably wouldn’t take the risk. TalkTalk, after all, had had months to find a buyer but failed to land a credible deal even when its retail division and its wholesale unit, PXC, were up for grabs separately.

Disappointed would-be buyers blame the reluctance of BT, as the critical supplier to TalkTalk, to extend financial support to a new ownership vehicle. From BT’s point of view, however, one can see why another private equity backer for TalkTalk wouldn’t feel like an improvement on the last one. As it is, BT will be booking £100m as a non-payment of a debt even as it takes control.

The deep problem here is that TalkTalk – Sir Charles Dunstone’s creation more than 20 years ago – hasn’t been doing much real challenging work of late. After going through the refinancing wringer more times than is healthy, it was a financially distressed company. At the last count, borrowings were in the region of £1.5bn, a staggering sum for a loss-making business with only 1.5 million retail customers and 1 million wholesale ones. Telephony, remember, tends to be a low-margin game even when things are going well.

That is not to say the politicians get a free pass. Successive governments have been told many times by the regulator Ofcom that a “supplier of last resort” regime should be in place in the broadband market, just as it is in energy and water. The logic is simple: in extremis, there should be a way for a government-supported operation to step in to prevent sudden disconnections and look for an orderly permanent solution.

The unavoidable fact, though, is that such a regime didn’t exist with TalkTalk. That glaring hole in the regulatory set-up needs to be addressed for future cases. But a weekend arrangement with BT, however objectionable in theory, at least has the advantage of not drawing on a penny of public money.

The medium-term regulatory test will be to ensure BT and Openreach can’t abuse the advantage of gobbling TalkTalk. There was a theatrical public exchange of letters between the BT chief executive, Allison Kirkby, and the Ofcom boss, Dame Melanie Dawes. The former pleaded for regulatory mercy, in effect, for removing a political problem; the latter replied that applying the regulatory framework was a statutory duty.

It’s anyone’s guess how that will work out in practice since the wriggle-room would seem to be enormous. But the guiding principle hasn’t changed – wholesale operators need to have access to Openreach’s network on reasonable commercial terms. TalkTalk couldn’t make it pay but that, in the end, seems primarily to be a story of its own perilous financing. Wrapping the business into BT is very far from being ideal – but it’s not the worst pragmatic fudge.