AOL parent group Time Warner hired Citibank in the first half of this year to review the options for AOL UK. The consultants concluded that the company should abandon being an Internet service provider (ISP) in the U.K. and concentrate on its portal services, which are benefiting from the online advertising boom.
Carphone Warehouse, which sells cell phones and mobile service, entered the ISP market earlier this year. The company paid $684.5 million (370 million pounds) for AOL UK.
"The acquisition of AOL's UK Internet access business is transformational for our broadband business," Carphone Warehouse CEO Charles Dunstone said Wednesday.
AOL UK has 600,000 dial-up and 1.5 million broadband customers in the U.K.
"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," Dunstone added.
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 U.K. (after NTL:Telewest and BT), with about 2 million customers. It entered the ISP field only this year, with a headline-grabbing initiation of the "free broadband wars," although AOL UK's customers apparently will continue to be paid subscribers.
The other short-listed bidder for AOL UK is thought to have been BSkyB, after Orange and BT were rumoured to have dropped out of the race two months ago.
The AOL UK news comes on the same day as Carphone Warehouse's second-quarter trading results, which showed that. This meant Carphone Warehouse had to acquire more wholesale broadband from BT, leading to start-up broadband losses of around $130 million.
The company also announced it was expecting $37 million in additional costs during the current financial year due to the demand for the free broadband offer.
The AOL UK deal is expected to close on Dec. 31.
David Meyer of ZDNet UK reported from London.