Carphone Warehouse takes home AOL UK

Carphone Warehouse has bought AOL UK for £370m, following a protracted and secretive bidding war.

Parent group Time Warner hired Citibank in the first half of this year to review the options for AOL UK. The consultants concluded the company should abandon being an ISP in the UK to concentrate on its portal, which is benefiting from the online advertising boom.

Carphone Warehouse became involved in June, when reports suggested chief executive Charles Dunstone wanted AOL UK's expertise in unbundling - the ISP has 600,000 dial-up and 1.5 million broadband customers in this country.

Dunstone said on Wednesday: "The acquisition of AOL's UK internet access business is transformational for our broadband business.

"This deal gives us significant scale to complement the rapid organic growth of our free broadband proposition. In addition, the joint development of AOL's already successful audience platform will bring us new advertising and content revenues in a proven and low risk manner."

AOL UK's access business - including its customer base, management and infrastructure - will pass entirely to Carphone Warehouse, while AOL will continue to provide "co-branded portal, content and other audience services".

Carphone Warehouse will therefore become the third largest broadband provider in the UK (after NTL:Telewest and BT), with approximately two million customers. It only entered the ISP field this year, with a headline-grabbing initiation of the "free broadband wars", although it is understood that AOL UK's customers will continue to be paid subscribers.

The other shortlisted bidder for AOL UK is thought to have been BSkyB, after Orange and BT were rumoured to have dropped out of the race.

In a statement on Wednesday, Carphone Warehouse said the acquisition would, over time, "create significant operating efficiencies in relation to network infrastructure and marketing costs", as well as providing it with "a ready-made platform via which it can generate material incremental value from its large and growing customer base".

The news comes on the same day as Carphone Warehouse's second-quarter trading results, which showed the "free broadband offer" had taken off more quickly than anticipated. This meant Carphone Warehouse had to acquire more wholesaled broadband from BT, leading to start-up broadband losses of around £70m.

The company also announced it was expecting £20m in additional costs during the current financial year, with the unexpectedly high take-up of free broadband meaning "incremental wholesale broadband costs incurred across a larger base, delays to LLU [local loop unbundling] migration and an acceleration in customer service costs".

The AOL UK deal will be officially concluded on 31 December this year.

David Meyer writes for ZDNet UK