Private Equity Is a Threat and Opportunity for BT
(Bloomberg Opinion) -- Philip Jansen has made a lot of money in, and for, the private equity industry. He probably didn’t agree to be chief executive of BT Group Plc for the pay. The attraction of running Britain’s former telecoms monopoly is the chance to burnish one’s corporate reputation. Fighting off an opportunistic takeover approach — especially one from a consortium of leveraged buyout firms — would achieve just that.
The former Worldpay boss has asked bankers at Goldman Sachs Group Inc. to prep defenses against a bid, Sky News reported this weekend.
Heavy investment in fiber broadband is hurting BT’s stock price. The market values the company at 11 billion pounds ($14 billion). Add back net debt (excluding leases) and the estimated pension deficit, and the shares ascribe BT an enterprise value of roughly 30 billion pounds. Analysts at New Street Research reckon 38 billion pounds is what’s merited.
It’s understandable why Jansen expects buyers at BT’s doorstep. Now would be a potentially rewarding time to try a deal before a regulatory review and a fresh pension valuation are completed early next year. A confident bidder may prefer to exploit the associated uncertainty weighing on BT’s shares and pounce sooner. The most plausible scenario is that a private equity consortium pressures it to sell its prized asset, the Openreach broadband network. Some analysts value this at above 20 billion pounds on its own.
BT’s pension program is regarded as a poison pill against such a scenario, but that may be wishful thinking. True, the plan has a claim on Openreach’s assets. Its liabilities exceed its investments by 11 billion pounds before tax credits, UBS Group AG analysts estimated last month. But selling Openreach would generate immediate funds for shoring up the program, while cutting debt at the BT businesses left sponsoring it. A bidder should at least get a hearing from the pension trustees.
The question then is whether Jansen can convince BT shareholders they’re better off without such a deal. The easy bit would be to demonstrate there are cost saving opportunities that are merely waiting for that regulatory review to conclude.
Financially, he could probably make BT more efficient by thinking like a buyout firm. Start by acknowledging the infrastructure-like qualities of Openreach and its high borrowing capacity. A private equity bidder could raise perhaps 15 billion pounds against the asset, New Street reckons. BT’s reported leverage has recently risen due to new accounting rules that add leases into the equation. Look through that and BT’s net debt could be less than 2.5 times its Ebitda this year, pension deficit included, New Street judges. Investors are usually comfortable with the ratio nudging 3.
Shareholders may actually welcome borrowing to pay down the pension deficit. BT’s credit score might suffer, but in a world of negative rates, this may not hurt its borrowing costs much. The next step would be to show the value of Openreach through an initial public offering or stake sale, as has already been mooted.
There’s a long list of U.K. companies that attracted successful bids because their heavy investment spending weighed on their share prices. With the right defense, BT doesn’t have to join them.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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