Last week BT unveiled a plan to invest £12bn to extend its full fibre network to 20m homes.
But its once-in-a-generation upgrade was largely overshadowed by the cancellation of its annual dividend for the first time since the UK telecoms group was privatised in 1984. News of a merger between BT’s main rival Virgin Media and O2 then made life even more difficult.
BT chief executive Philip Jansen told the Financial Times this week that the dividend cut — which frees up around £2.5bn in cash for fibre investment — was the “final piece of the jigsaw” in preparing the company for a bright future.
Yet doubts continue: does BT have enough financial firepower to complete its ambitious rollout of fast internet to households and businesses while providing a decent return to long-suffering shareholders? And can it bolster its position?
Asked by analysts last week, if he would consider spinning off the company’s network arm Openreach, Mr Jansen answered “not now”.
Yet in the background BT has held talks in the past three weeks with infrastructure investors who are keen for exposure to Openreach, according to people familiar with the matter.
“It’s got a ‘selling the family silver’ feel to it, but to be fair they will struggle to find the capital to extract the full value of the asset so probably a reasonable option,” said one top-20 investor at the prospect of a partial sale of Openreach.
Simon Lowth, chief financial officer of BT, told analysts on a call on Friday that the timing was not right for an immediate sale of a stake in Openreach but refused to rule out the move.
Openreach controls the national broadband network used by BT’s consumer arm as well as Sky, TalkTalk, Vodafone and dozens of other smaller players. It has long been of interest to private equity and infrastructure funds looking for monopoly-like assets offering long-term returns and high levels of cash generation.
With the stock flirting with 11-year lows, how to unlock the hidden value of Openreach — which analysts value at up to £22bn, more than double BT’s market capitalisation — has become a pressing issue.
BT has engaged “parallel talks” with different potential investors. Shares in BT rose by more than 5 per cent on Friday after the FT reported the talks. The mechanism and timing of how an external investment would work remains uncertain.
A direct sale of a stake in Openreach — the prize for interested parties — is complicated by pension and regulatory issues. BT is set to kick off a lengthy new valuation of its pension liabilities in the summer and trustees would need assurance about their access to Openreach’s cash. Future regulation of fibre networks is also up in the air, which could be a deterrent to potential investors.
One option is for the funds to invest directly in BT shares, potentially contributing billions to its fibre roll out and gaining exposure to the undervalued network asset ahead of any future split.
Meanwhile BT’s equity value has continued to dive. It has lost almost 80 per cent in the past five years and its shares slumped to their lowest level since 2009 last week, leaving BT valued at £10bn, half that of Swisscom, its equivalent in Switzerland, which generates half the revenue and 40 per cent of BT’s earnings.
Over the past 20 years, BT has been a story of boom and near bust and suffered two major crisis points: in 2001 when its debt forced it to jettison its mobile network and directories business and in 2008 when its profits collapsed 80 per cent due to issues at its international arm. The latest downturn was spurred by an accounting scandal in Italy and a profit warning in January 2017 that triggered a major overhaul including 13,000 job cuts and the sale of its historic headquarters opposite St Paul’s Cathedral.
BT has made headway since the 2017 crisis. Its consumer division, the largest broadband provider in the UK, has improved both its finances and its customer service since BT bought EE and appointed the mobile company’s management to combine the business. Meanwhile Global Services, the international arm selling services to multinational companies, has cut costs, reduced its customer base and is no longer a drain on the business.
Yet that has not been reflected in the share price and many investors have been waiting to see a more radical plan for improvement under Mr Jansen — who took over as chief executive early last year.
Robert Grindle, an analyst with Deutsche Bank, said that BT’s transformation strategy has been in “slow motion” over the past decade and as a result it faces a “battle royale” at the infrastructure level with a number of well-funded smaller fibre players.
So-called “altnets” backed by the likes of Goldman Sachs, KKR, M&G Prudential and Macquarie are already building fibre. Virgin Media’s owner Liberty Global has also been exploring ways to finance the expansion of its cable and fibre network by between 5m and 8m homes and the merger with O2, agreed this month, creates a more formidable competitor to BT’s consumer arm.
Mr Grindle said the company’s cash was already under pressure because of its large pension deficit top-ups — almost £1bn a year under the current valuation — and hefty restructuring charges of £1.3bn over the next five years. “It’s a tough gig,” he said of Mr Jansen’s task in reviving the company.
The telecoms company, which has £18bn of net debt, also faces another huge investment in 5G equipment for its EE mobile division. Restrictions on use of equipment from Huawei have added to the cost.
The issue remains the speed at which Mr Jansen can deliver the turnround and win back trust after the dividend cut. A second top-20 shareholder said that previous reassurances by management had proved meaningless. “[We’re] pretty upset. They had repeatedly told us that they wouldn’t cut the dividend,” he said.
Mr Jansen told the FT that patience would be rewarded. “In five years, BT will be a better company,” he promised.
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