UK mobile retailer Carphone Warehouse announced the acquisition of AOL’s internet access business in the UK for £370m on Wednesday.

Under the agreement, Carphone will acquire AOL’s 2.1 million internet access customers in the UK as well as the unit’s supporting management and infrastructure.

AOL will deliver a co-branded portal, content and other audience services and will manage the online advertising sales for Carphone Warehouse’s combined broadband customer base through a revenue-sharing agreement.

AOL’s UK subscriber base is anticipated to comprise 1.5 million broadband customers and 600,000 dial up customers, which will join Carphone’s 625,000 broadband applicants and 2.7 million voice customers.

Carphone anticipates the acquisition of AOL will give the company a broadband customer base of approximately 2 million – once all Carphone’s applicants are actually connected – making it the third largest broadband provider in the UK.

The deal will also provide Carphone with a ready made platform through which it can target and generate value from its audience.

The UK move follows AOL’s exit of its internet access businesses in Germany and France, which the company claims will give it a stronger platform for providing portal, content and other audience services, on a stand alone as well as a co-branded basis, and managing online advertising sales.

But Carphone confirmed Wednesday that it expects its broadband business to run up an operating loss of £70m during the 2007 fiscal year. Although the loss was expected it came in at £20m more than predicted.

The company that kicked off a “free” broadband war in the UK in April blamed the loss on higher than expected demand. Carphone offers “free broadband” at speeds up to 8Mb to anyone who signs up to the company’s Talk 3 International calls package.

Carphone Warehouse claims the Talk 3 package is guaranteed to be cheaper than anything BT offers and demand for the service has been intense, despite similar offers from BSkyB and Orange. “It is a consequence of our own success,” said Peregrine Riviere, director of corporate affairs at Carphone.

Riviere said Carphone expects its pre tax profit for 2007 to be £110m or £10m less than originally forecast. In a trading update for its Q2, the firm said it had sold 2.38m mobile phones representing an increase of 34 per cent on the same period in 2005.

Much of the operating loss has been forced on Carphone which had to react rapidly to demand when it announced the “free” service. It hired hundreds of call centre staff to deal with the flood of enquiries and by Sept 30, around 421,000 of the 625,000 customers who ordered the system had it installed in their homes.

Mike Philpott, principal analyst at Ovum said the rush to staff the firm’s call centres was mystifying: “I’m just not sure how they’ve misjudged this given the marketing they have put behind the offer.” He explained that while those costs would have been painful, the failure of the firm to shift customers from BT’s network onto its own was, “inevitably,” affecting profits.

“Carphone’s original plan was to put these people onto its own network but the vast majority are still on BT’s network which is more expensive.”

According to Philpott, Carphone has managed to move just 20,000 customers onto its own network with the other 400,000 still on the BT network at a cost of around £12 or £13 per customer per month. “That figure would be around £8 if they were on Carphone’s network,” Philpott said.

The rise and rise of Carphone Warehouse:

All eyes on Carphone Warehouse

Free broadband sparks price war

Carphone reports strong demand for free broadband

Orange to offer free broadband in UK

Carphone threatens BT

Broadband rush continues at Carphone

No significant impact on NTL from Carphone Warehouse, says Burch