Deloitte reportedly brought to light a series of “unusual accounting practices(Quote from a Telegraph reporter) in the as-yet-unpublished annual report of broadband ISP TalkTalk, which listeners said might – in a reasonable worst-case scenario – not allow them to meet covenants on their debt than by excluding more “exceptional objects” daily expenses.
The low-budget internet provider is currently still under the pressure of a heavy debt mountain of around £1.1 billion and appears to have struggled to reduce customer churn since its privatization as part of the 2020 takeover by Toscafund – the organization controlled by hedge fund magnate Martin Hughes (here).
According to The Telegraph (paywall), which has seen the operator’s latest annual report, lenders generally limit the debt of corporate borrowers to a multiple of their underlying profitability, thus reclassifying more costs as exceptional that can keep them in the limitations (exceptions can be things like customer acquisition and retention).
TalkTalk is always said to present its accounts on a going concern basis (i.e. a business that is operating and making a profit), which Deloitte fears is in danger in the future . The listener pointed out a “high level of estimation” in the way the income was recognized, and “a high level of management judgmentin the decision to book the £31m costs of switching customers from copper to fiber broadband as exceptional.
TalkTalk’s debt rules will become more restrictive next year, which could increase the risk that the operator will not honor its commitments and possibly even invoke insolvency proceedings. The provider has not commented on the Telegraph report, but Virgin Media (VMO2) is known separately to discuss the prospect of a £3 billion deal to acquire TalkTalk (here).
We haven’t had a solid update on VMO2 and TalkTalk’s proposal since mid-July 2022, but the newspaper says VMO2 is currently performing due diligence on the proposed deal. Such an acquisition would be a way to tackle the supplier’s debts and, in theory, a deal could be done as early as October 2022.
Although we don’t have the latest TalkTalk annual report (assuming that’s what the Telegraph meant), we do note that the latest TalkTalk accounts – as published in July 2022 – can be downloaded here.