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Carphone Warehouse on Wednesday agreed to buy Time Warner’s AOL internet access business in the UK in a move that will make it the country’s number three broadband provider.

Carphone will pay £370m in cash for the AOL business, and will have about 2m broadband customers after the deal is concluded in December.

Carphone’s shares surged 8 per cent to close at 360.25p.

Charles Dunstone, Carphone’s chief executive, hailed the AOL deal as “transformational for our broadband business”.

Carphone is currently the number seven broadband provider in the UK, and the AOL deal should bolster its ambition to become the main alternative to BT in residential fixed-line telephony.

In April, Carphone unleashed a broadband price war by offering “free” high-speed internet access to people who signed up to its £21 per month Talk Talk fixed-line phone service.

Carphone said it expected its group pre-tax profit for the year ending March 31 2007 to be £120m. The purchase of the AOL business, together with strong performance in Carphone’s mobile phone retail outlets, will offset an anticipated £70m operating loss in its broadband arm, which is £20m more than forecast in April.

The loss is a result of higher-than-expected demand for Carphone’s “free” broadband offering, which forced it to hire hundreds of additional call centre staff.

In a trading update, Carphone said 625,000 people had applied for “free” broadband by September 30, although it admitted 78,000 subsequently cancelled or switched to other suppliers. Consumer groups expressed concern over whether Carphone could cope with the integration of AOL’s internet access business.

“Every integration has its teething problems and the fact is that Carphone is still trying to put its own house in order following the unprecedented demand generated by the launch of its free Talk Talk broadband deal,” said Chris Williams, spokesman for uSwitch.com, the price comparison service.

Carphone insisted its existing broadband business would make an operating profit of £30m-£40m in 2008.

It said the purchase of the AOL internet access business, which would be funded through an extension to its existing debt facilities and is subject to clearance by competition authorities, would provide an additional £30m-£40m of profit.

Under the Time Warner deal, Carphone is entering into a revenue-sharing agreement with AOL that will give it a slice of online advertising.

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