WSJ : BT Investors Should Brace for Openreach Static

BT Investors Should Brace for Openreach Static

Loosening BT’s hold on its infrastructure arm won’t necessarily result in better services for customers

Openreach is set to become thornier for BT Group PLC, with or without a forced spinoff by regulators.

The U.K.’s Office of Communications, or Ofcom, on Thursday said it would consider forcing the separation of the incumbent telecoms group’s infrastructure arm, as part of its review of the sector. Shares fell only slightly on a day when the sector was up; the decision was largely expected.

The regulator also pointed to several good reasons why BT’s Openreach ties may not be cut. Among them is that the existing model isn’t necessarily broken. The U.K. is one of the most competitive broadband markets in Europe: the average price of a residential broadband package has fallen 40% over the past 10 years.

The problem for Ofcom is that loosening BT’s hold on Openreach won’t necessarily result in better services for customers and may even raise prices, as occurred in New Zealand after authorities there separated its telecoms infrastructure. An independent Openreach wouldn’t face more competition and so wouldn’t necessarily invest more in infrastructure.

Nevertheless BT investors can’t sit comfortably. The unit contributed a third of the group’s operating profit last year to March and continues to be its largest contributor of free cash flow, boosting BT’s financial muscle to go on buying sprees elsewhere. Even if Ofcom doesn’t recommend that the unit be separated, it could still spur changes that ultimately dampen BT’s earnings power.

The two main threats center on service quality and infrastructure investments. Ofcom could require BT to improve services, such as setting targets for faster line installations and imposing fines if it fails to meet these.

And while the regulator can’t tell BT how much to invest, it can apply pressure. Regulators have already said more investment is needed to provide ultrafast broadband and to extend services to some rural areas. Meanwhile strict rules on how much BT can charge rivals restrict its ability to pass on costs, potentially squeezing margins.

BT’s operating margin is currently about 20%, well ahead of peers such as Deutsche Telekom and Orange. One reason is that capital expenditure for Openreach has stayed stubbornly flat since BT’s fiscal year 2008, even as revenue has doubled, according to FactSet.

In one form or another, Openreach is likely to impose higher fees on BT investors.

>>> US Gapping Up

Gapping up
In reaction to strong earnings/guidance: NFLX +11.5%, ANFI +7.6%, ONDK +5.3%, EBAY +4%, C +2.5%, INTC +2.4%, KEY +2.3%, PM +2%, CPSS +1.3%, UMPQ +1.1%, KMI +1%, BBT +0.9%, DPZ +0.8%

Select financial related names showing strength: SAN +1.9%, ING +1.6%, DB +1%

Select metals/mining stocks trading higher: BHP +2.1%, AKS +2%, RIO +0.7% (reports Q2 production of iron ore rose 9% YoY), CAS +0.7%.

Select auto related names showing strength after good data out of EU: TTM +2.3%, FCAU +3%, TM +2.1%, ALV +1.6%

Other news: STV +16.6% (provides updates on its asset restructuring with Shanghai Tongda Venture Capital; Tongda has received an approval in principle from the Ministry of Commerce in China), NVGN +7.7% (confirms receipt of Orphan Drug Designation from the FDA for its Anisina treatment for neuroblastoma ), FTNT +4.4% (still checking), GLW +2.2% (announced $2 bln share repurchase program), RDUS +2.1% (reports positive preclinical data for its investigational drug RAD1901 in combination with CDK and mTOR inhibitors), MGA +2.1% (confirms it will acquire the Getrag Group of Companies for EUR 1.75 bln), STM +2% (in sympathy with INTC), PVA +1.9% (sells its East Texas assets to an undisclosed buyer for $75 million), SDRL +1.8% (still checking), BLPH +1.7% (entered into an amendment to the transition services agreement with Ikaria to advance the termination date of the Services Agreement from February 8, 2016 to September 30, 2015), NBG +1.7% (Greek Parliament passes bailout deal), GPRO +1.4% (still checking), MU +1.1% (in sympathy with INTC), MDXG +0.9% (scientific study demonstrates that MiMedx allografts stimulate cellular proliferation and migration in a variety of adult stem cells), KMI +0.9% (to purchase 100% of Shell's Equity Interest in the Elba LNG Liquefaction JV; KMI's expected incremental investment resulting from this transaction is ~$630 mln; co also reported earnings)

Analyst comments: ORAN +2.6% (upgraded to Buy at Berenberg), STO +2.1% (upgraded to Buy from Neutral at Citigroup), AVGO +1.4% (initiated with an Outperform at BMO Capital ), WBA +1.1% (upgraded to Outperform from Neutral at Credit Suisse), GOOGL +1% (upgraded to Outperform at BMO Capital Mkts
)

>>> US Gapping down

Gapping down
In reaction to disappointing earnings/guidance: GRMN -11.6%, FCS -8.6%, BKMU -3.8%, SHW -3.7%, TSM -2%, BX -1.4%, HCA -1.2%, GS -0.7%, FBRC -0.6%, UNH -0.5%

Other news: ANR -41.2% (WSJ reporting that co is in talks to obtain bankruptcy financing), SYN -19.1% (prices its offering of common stock), ROVI -9.4% (provides an update on ongoing litigation; committed to enforcing its intellectual property against Netflix (NFLX)), RLGT -5% (Radiant Logistics and certain shareholders commenced an underwritten public offering; size not disclosed ), FPI -3.2% (prices offering of 3,000,000 shares of its common stock $11.00 per share), RARE -2.9% (prices offering of 2,200,000 shares of its common stock at $120 per share), NAV -1.9% (disclosed a lawsuit filed against to co by the EPA relating to allegations that various heavy-duty diesel engines it introduced did not meet the EPA's emissions standards)

Analyst comments: GM -1% (downgraded to Equal Weight from Overweight at Barclays), UA -1% (hearing of a couple of cautious broker notes ahead of earnings next week), CYH -0.8% (downgraded to Sector Weight from Overweight at Keybanc Capital Mkts)

>>> Watch Gemalto on FT article on eSim...

FT : FApple, Samsung in talks with telecom groups to launch e-Sim card
Apple and Samsung are in advanced talks to join the rest of the telecoms industry to launch electronic Sim cards, in a move could fundamentally change how consumers sign up to mobile operators.
The GSMA, the industry association which represents mobile operators worldwide, is close to announcing an agreement to produce a standardised embedded Sim for consumer devices that would include the smartphone makers.

The traditional Sim card locks in the user to a network but an embedded Sim would enable a smartphone, tablet or wearable user to avoid locking themselves into a plan with a single operator or sign up to switch instantly.
Networks expected to support the plans include AT&T, Deutsche Telekom, Etisalat, Hutchison Whampoa, Orange, Telefónica and Vodafone.
Anne Bouveret, chief executive of the GSMA, said all parties were heading towards an agreement for the “common architecture”.
However, with any deal still contingent on finalising the technical specifications it will be at least a year before any devices supporting the electronic Sim reach the market.
The GSMA said: “With the majority of operators on board, the plan is to finalise the technical architecture that will be used in the development of an end-to-end remote SIM solution for consumer devices, with delivery anticipated by 2016.”
Last year, Apple revealed its own Sim card for its latest iPads. However, it was supported by only a handful of operators such as T-Mobile and AT&T in the US, and just EE in the UK. Those familiar with its UK rollout said that it had not been widely adopted.
The electronic Sim is not expected to replace the Apple Sim, a piece of plastic that fits into a device and could be included in the next generation of iPhones.
The GSMA said it was “continuing to work with Apple to secure their support for the initiative. While we are optimistic, a formal agreement with them is still in progress.”
Apple declined to comment.

The GSMA has already come up with an embedded Sim standard for the management of connections in the machine to machine market, where physical SIMs might not easily be changed in devices such as utility meters, traffic lights or assisted living systems.
“We have got everyone back on one point, with Apple and Samsung agreeing to be part of that specification,” said Ms Bouveret. “We have been working with them and others to create an industry solution for machines and will agree a solution for consumer electronics.”
Ms Bouveret, who will step down as chief executive this year, said an industry-wide electronic Sim was one of several objectives established during her time in office.
She added that about 3.7bn people had a mobile phone — about half the world’s population — but that connecting the remainder would be a huge challenge for the industry.
Ms Bouveret also pointed to the service that allowed the phone to act as a single point of identity for multiple online services, but added that more work was needed on developing next-generation 5G mobile networks.