BT bid hopes look detached from reality
Shares jumped even though Reliance Industries knocked down talk of bid for UK telecoms company
It is increasingly hard to penetrate the mix of takeover talk and wishful thinking swirling around BT.
Shares in the telecoms group jumped 9 per cent on Monday on a story that Indian billionaire Mukesh Ambani was considering a bid, after his Reliance Industries group missed out on buying the Dutch unit of T-Mobile.
The story was, in the words of Reliance, “speculative and baseless”. But why let that stand in the way of a good takeover tale? BT’s shares were still up 7 per cent, after the Indian group’s denial.
BT investors are eager for signs that a quick win is coming. That’s understandable: its share price has halved in the past five years. The company is sinking more than £1bn a year into rolling out its full-fibre network, aiming to pass 25m of the UK’s homes by the end of 2026, or more than 80 per cent of the total. It is accelerating to a breakneck pace of more than 4m properties a year.
That is a long-term drain on cash flows for BT’s traditional investor base for an as yet uncertain return, even if shareholders get a near-5 per cent yield after the reinstatement of the company’s dividend.
Hence the euphoric reaction to BT’s announcement at its interim results this month that it had cut costs faster than expected and would spend slightly less than forecast in its peak investment year. And to Ambani’s non-interest in buying BT. And to talk that 12 per cent shareholder Patrick Drahi could be poised to bid after his standstill expires on December 11, with BT shares down about 20 per cent since the June high after his investment.
Even European dealmaking, with KKR’s €33bn bid for Telecom Italia, was taken as a signal of rampant investor interest in beaten-down, strategically challenged telecoms assets and was good for a bump in BT shares.
There probably isn’t a shortcut here. BT’s board, under new chair Adam Crozier, would (you’d hope) set a high bar for a sale at a point of near-maximum fog in terms of the returns from fibre rollout.
More fundamentally, fantasy M&A based on the value locked up in BT’s Openreach infrastructure division — which recent reports have put at £40bn against BT’s £17bn market value — has always struggled on contact with reality.
Separating the division physically from the group, across thousands of exchanges nationwide, would be arduous and an unwelcome distraction from the fibre buildout. Transferring assets from BT Group to Openreach as part of any investment or sale would trigger commitments to the company’s mammoth pension scheme, with £65bn in liabilities and a deficit of close to £8bn. BT has said that the scheme gets a third of any cash from net disposals over £1bn a year, in its latest pensions agreement, up to a value of about £6bn.
“The bottom line is BT’s pension scheme is just too big an albatross for a bidder to be able to deal with properly and sensibly,” said pensions expert John Ralfe. That won’t always be the case: BT has a plan to reduce the deficit over 10 years. The fibre rollout should make BT less operationally complex.
This all assumes that any bid could navigate a political climate where more UK deals have been reviewed on national security grounds this year than at any point since 2002 and the government’s tougher rules on investment are set to come into force in January.
BT would fall under the sensitive sectors marked for mandatory scrutiny and would (rightly) get a tough review. UK fibre has increased actual and political significance, given remote working and the “levelling up” agenda. It is entirely conceivable that any party would find themselves on the hook for investment and jobs promises.
A 45 per cent premium today, as KKR offered in Italy, might seem appealing faced with years of investment, and gnawing concerns that well-funded competitors will eat into eventual returns. BT investors, like its engineers, are likely to have to do the hard yards.