TalkTalk snaps up Blinkbox

TalkTalk (TALK) has capitalised on Tesco's recent woes by reportedly paying just £5m for blinkbox, the grocery giant's video-streaming service. As part of the deal, the cut-price broadband, TV and telephony provider also scooped up Tesco's 75,000 broadband users and 20,000 landline customers.

The acquisition complements TalkTalk's 'quad-play' strategy of offering broadband, TV and both fixed-line and mobile telephony. The group plans to integrate blinkbox into its fast-growing TV business, enabling customers to view films and TV shows across numerous devices, both at home and on the move.

Blinkbox is currently unprofitable, due in part to fierce competition from pay-TV titan Sky (SKY) and streaming service Netflix. It posted nearly £18.5m in pre-tax losses in the year to February 2013, on turnover of just £3.2m. This will make punchy analyst forecasts for TalkTalk harder to meet: Barclays currently expects full-year cash profit of £275m, a big leap from the first-half figure of £110m.

Yet the broker also thinks the influx of Tesco customers could add £10m to TalkTalk's annual cash profits, somewhat offsetting losses from blinkbox. With ambitious plans to grow revenues by 4 per cent a year over the next two years, management seems to be betting that every little helps.

Besi Research says…

Buy. TalkTalk is mopping up a small number of customers, probably adding about 50,000 broadband users to its base of four million. It follows a string of similar deals, including the acquisition of 98,000 of Virgin Media's customers last November. A key element of TalkTalk's strategy is selling more services to its customer base, particularly TV to its broadband users, which the purchase of Blinkbox supports. We think the deal will make a relatively modest contribution to revenue and cash profit, but it could help TalkTalk meet its growth targets. It has historically achieved top-line growth but at the expense of profit margin. If it manages to fix that, there's an awful lot of upside to the shares.

Credit Suisse says…

Hold. This is a sensible acquisition that should generate value. Acquiring Tesco's broadband customers will allow TalkTalk to further leverage the scale benefits of its network. Buying blinkbox, meanwhile, should bring with it the technical expertise needed to upgrade TalkTalk's TV platform. Making it useable outside of the home and on multiple devices has been on TalkTalk's roadmap for some time, and we think buying blinkbox will be much quicker than developing those applications internally. Moreover, blinkbox's direct ties to movie studios should improve TalkTalk's content library, increasing its attractiveness to customers. Even though blinkbox is heavily loss-making, we believe the price tag is modest given the cost and revenue synergies.