Time Warner sold AOL’s United Kingdom branch Wednesday to Carphone Warehouse, a British mobile, audio, and game retailer, for £370 million ($688 million).

The acquisition has yet to clear the European Commission’s competition authority, but it is expected to close by December 31, 2006. Upon closing, Carphone Warehouse will become the third largest broadband provider in the U.K. behind BT and NTL.

Carphone Warehouse will add 2 million customers to its already established 421,000 customer base with a live broadband connection.

“Carphone Warehouse is in the fixed space of voice right now,” said Michael Philpott, principal analyst at U.K.-based research and analyst firm Ovum. “Most of their profits still come from their fixed voice lines, but we all know what’s happening to the fixed voice market. So they need to look away toward the future. This is a small step in that direction.”

Under the agreement, Carphone Warehouse will acquire AOL’s U.K. Internet access customer base, supporting management, and infrastructure. AOL will in turn provide co-branding on its web portal. AOL will also take on advertising sales for Car Warehouse in a revenue-sharing agreement.

Carphone Warehouse estimates the deal will increase its current year pretax profits by £10 million ($18.6 million) and next year’s pretax profits by £30 million to £40 million ($55.7 million to $74.3 million).

The acquisition of AOL U.K. is the latest move in parent company Time Warner’s plan to base AOL’s revenue more on advertising rather than subscriptions. After being broken into four sections—access, audience, digital services, and AOL Europe—AOL no longer needed the European sector.

In August, AOL announced it would begin the sale of its European branches. AOL France was sold to French fixed-line operator Neuf Cegetel for €288 million ($365 million) in September.

In September, Telecom Italia, an Italian mobile, fixed-line, and IPTV communications company, bought AOL Germany for €675 million ($856 million). The U.K. is the last branch to be sold.

Time Warner stock rose $0.12 to $19.10 in recent trading Wednesday. Carphone Warehouse was also up from yesterday’s close in London, climbing from 333.50 pence ($6.19) to 360.25 pence ($6.69) at the close of trading Wednesday.

Added Expense

“The only other thing people are making some noise about over here is the added expense,” said Mr. Philpott. “Carphone Warehouse expected to spend €50 million [$92.8 million] in this move, now they have upped that to €70 million [$130 million].”

With a rush of new customers signing onto Carphone Warehouse’s services, an enlarged customer service group, more employees, and more network capacity from BT Wholesale seem to be the foremost reasons for the increase in price.

While not a mobile operator, it looks as though Carphone Warehouse could be the next communications company to jump into the fixed mobile convergence market and provide fixed-line, mobile, and broadband to its customers. The move wouldn’t be surprising, but it might be a mistake.

In June, the U.K.-based research group Informa found the fixed mobile convergence market’s time had already come and gone.

“Do customers really want all their communication from a single source?” asked Mr. Philpott. “It’s still a debate as to what the customers really do want.”

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