AOL UK to partner with Vodafone?

Rather than being sold to BSkyB or BT, AOL’s UK arm could be heading for a partnership with a mobile operator such as Vodafone or O2

Amid a great deal of speculation, Citigroup will complete its strategic review of AOL UK's future this week.

It has been widely reported that Citigroup will recommend that AOL's UK operations are sold off. However, a wholesaling partnership could be on the cards instead.

A source within AOL UK has indicated to ZDNet UK that, while parent company Time Warner is still "getting all the options", the company could find its perfect match in a mobile operator such as Vodafone or O2.

Both companies plan to launch fixed-line broadband services, and have said they would prefer to go into a wholesale partnership with another telecoms provider rather than buy an ISP.

"We have a fairly significant local loop investment that we are looking to wholesale," said the AOL UK source on Monday. "People like Vodafone and O2 have said they want to buy wholesale broadband connections from other providers — we are one such provider. We would in that situation in effect be acting as a telco."

Referring to a recent £120m investment by AOL UK in local loop unbundling (LLU), the AOL source said part of that investment had always been intended for wholesaling purposes.

Recent press attention has focused on the possibility of AOL UK being sold for anywhere between £660m and £1bn, with speculation that bidders have included BT, BSkyB, Carphone Warehouse and Vodafone.

However Carphone Warehouse is already enjoying an unexpected level of success with its "free broadband" service, and Vodafone has stated that it is not currently interested in buying an ISP.

It is understood that many of the companies mentioned in the media have made inquiries to Citigroup about AOL UK, rather than firm offers.

Analyst Dean Bubley agreed that a partnership with a company like Vodafone "could potentially work well".

However, Bubley also suggested that, while "partnerships are lower-risk... they do tend to have less chance of success as you don't have your shareholders on your back quite as much".

Bubley added that AOL could already have workable business models for such partnerships up its sleeve, thanks to similar arrangements involving its American operation.