Tiscali’s decision to prepare itself for sale, announced this week, has shaken up the UK broadband industry at a crucial time for the sector. As the market slows – the growth rate stands at 18.5 per cent year on year compared with almost 50 per cent four years ago – and it becomes increasingly difficult to attract new consumers, the chance to grab Tiscali’s 1.7 million UK broadband customers has got the big players eyeing the group.

The trend in the broadband market, like mobile before it, is towards consolidation, with smaller players being mopped up by the big names. Analysts predict that BT, Virgin Media, Carphone Warehouse and Sky will be the survivors.

Tiscali, far from being a minnow, is the fourth-biggest broadband provider in the UK.

Analysts consider Carphone Warehouse one of the most likely buyers, although only if the price is low enough. The Acton-based group has traditionally grown its base through acquisition, snapping up AOL at the end of December 2006 for £370 million. Buying out Tiscali could prove particularly attractive as Carphone has the chance to turn a loss-making proposition into a profitable one.

The Italian firm currently offers broadband rates of £6.49 for the first three months and £12.49 thereafter. But given that it still has to pay line rental to BT, Tiscali is making a loss on the deal. Carphone on the other hand has its own networks and so can offer lower prices without having to pay a proportion over to the fixed-line giant. What’s more, with Tiscali’s customers under its roof, Carphone would emerge as the market leader, pipping BT’s 4.25 million customers by about 500,000.

However, integrating Tiscali’s notoriously messy networks would certainly be a challenge. In the past few years it has swallowed a series of smaller companies including Pipex (which in turn had bought Bulldog), leaving it with seven different platforms and bill structures.

BT, while perhaps less likely as a suitor, also stands to gain from a putative acquisition. The company has strong organic growth – ratcheting up an additional one million customers in the past year – but gaining Tiscali’s customer base would significantly expand its lead in the market. In addition, BT would obviously not incur any line charges.

However, a key consideration is the potential trouble that BT could face from regulators if it makes any major acquisitions.

Another possible contender, BSkyB, would gain from the acquisition by having access to a whole new potential subscriber base to sign up for its television package. It is becoming increasingly difficult to make money from broadband, with the service becoming increasingly commoditised as it is added to TV and mobile bundles at reduced rates or offered virtually free. Rather than a money-spinner, for a company like BSkyB it is becoming a retention tool – if customers get TV, broadband and phone line together they are less likely to stray to a rival. BSkyB has become one of the top-five internet service providers in the past year, with its customer base soaring from 232,000 to 1.2 million, elbowing old-timer Orange into sixth position. Thanks to its strong organic growth it does not have the same need to expand through acquisition.

There is still everything to play for. Tiscali has merely announced its bankers – JPMorgan Chase and Intesa Sanpaolo’s Banca IMI – but it has yet to give an indication of a timeframe for the sale. Analysts have given a wide range of estimates for the potential bid price – from £450 million to £650 million. The current share value, although slipping 3.6 per cent yesterday, reflects the strategic value of it being sold to a competitor. The share price is likely to remain skittish until the situation clarifies.

Carphone Warehouse is looking strong. It is growing fast and after two years of investing in its broadband business, analysts expect to see cashflow finally coming through when its full numbers are released in June.

Investors need to question whether they are comfortable with the company’s debt levels if it chose to go ahead with another acquisition. Market feeling is that a deal is doable, but in the current economic climate increased debt may make some investors nervous.

For very different reasons BT is also a buy. Its share price has been hit hard in the past few months yet it is trading at 9.3 times price earnings ratio, with a 7.5 per cent dividend yield. Unlike Carphone it has low growth but it remains interesting with improvement in its global services margin due in the fourth quarter and share buybacks likely to be increased.

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