TalkTalk has opened takeover talks with a hedge fund tycoon nicknamed "the Rottweiler" after he mounted a £1.1bn bid for the phone and broadband provider.
The FTSE 250 company has agreed to discuss a deal with Martin Hughes' firm Toscafund, which is already its second-largest investor.
Toscafund reportedly offered to buy Talktalk last year for 135p per share, only to have the proposal rejected because the broadband firm's management thought this was too low.
It is now offering just 97p a share, after Talktalk's stock price slumped almost a third in the wake of the Covid crisis.
Shares jumped 18.5pc or 15.4p to 98.7p after the offer was announced, suggesting traders believe the approach could flush out other bidders and push the deal price higher.
The Toscafund takeover would need the backing of Sir Charles Dunstone, the founder and biggest shareholder in TalkTalk, who spun it out of mobile phone retailer Carphone Warehouse 10 years ago. His stake is valued at £342.3m under the terms of the deal, while co-founder David Ross still holds an 11.2pc stake which would be worth £128.7m.
TalkTalk said the possible cash offer would be made by a newly formed company backed by Toscafund, which is known for the confrontational approach Mr Hughes takes with his investments.
The hedge fund previously had a lengthy spat with tool hire firm Speedy Hire, attempting to oust its chairman in 2016 after he resisted pressure to merge with a rival.
Carl Murdock-Smith, an analyst at Berenberg, said Toscafund wants to take full control of TalkTalk but has kept the door open for Sir Charles to remain.
He said the deal is being structured in such a way that the 55-year-old entrepreneur could retain his 30pc stake in Talktalk after it becomes a privately owned business. Sir Charles - who is currently executive chairman - could also keep a seat on the board.
Mr Murdock-Smith said: “I think it is interesting that they are giving the option for Dunstone to stay.
“This could enable Dunstone to leave the distraction of public markets.”
The latest offer is a 26pc premium on Wednesday’s closing share price of 83.3p.
TalkTalk has long been regarded as a takeover target given its minnow status compared with rivals such as BT, Sky and Virgin.
Toscafund’s approach comes amid fresh consolidation in the telecoms sector, with Virgin Media and O2 announcing a £31bn mega-merger in May and takeover talk building around the mobile operator Three.
Britain’s competition watchdog made a formal request to the European Commission (EC) on Thursday for it to oversee the O2 and Virgin deal on the grounds that it will only impact British customers.
The merger falls under the EC’s remit, but can be referred to the UK’s Competition & Markets Authority.
TalkTalk has about £775m in debt and was forced to make a £200m cash call two years ago to prevent a breach of its debt agreements.
However, it has benefited from surging demand for broadband services during the pandemic - despite the crisis piling on extra costs.
TalkTalk warned in the summer that it would take a £15m hit from the crisis as headline revenues slipped 2pc to £1.51bn for the year to March.
The chaos also sent revenues edging 7pc lower to £358m for the three months to June, but TalkTalk said average revenue per user has significantly improved since then.
Its churn, the rate at which customers cancel their service, also hit a record low during the period.
TalkTalk simplified its business at the beginning of the year when it offloaded its broadband building arm Fibrenation to rival CityFibre for £200m.
Sir Charles also came close to selling TalkTalk to O2 four years ago, with the mobile operator looking to fund the move through a £10bn float on the London Stock Exchange.
However, the deal did not materialise because Brexit uncertainty stopped O2 owner Telefonica from pursuing a listing.