For British Phone Giant, $5 Billion May Not Be Enough

(Bloomberg) -- BT Group Plc has asked investors for another three years of patience. A 9 percent drop in the share price after Thursday’s grand unveiling of a new strategy suggests such forbearance is in short supply. And even if embattled CEO Gavin Patterson and new chairman Jan du Plessis can deliver on their three-year plan, there are still understandable concerns about their attachment to the network infrastructure unit, Openreach. 

For British Phone Giant, $5 Billion May Not Be Enough

The former British state phone company said 13,000 new job cuts will contribute to gross annual savings of 1.5 billion pounds ($2 billion), but there was little clarity on how much of that will find its way into earnings. Spending on fiber optic and 5G networks will see capital expenditure top 3.7 billion pounds ($5 billion) a year, and there will be no growth in the dividend or anticipated growth in Ebitda before 2021.

Given the political pressure on Openreach to get on with expanding Britain’s patchy fiber networks, it’s still far from certain whether that 3.7 billion pounds is going to be enough. The price it charges customers for access to those networks is also subject to regulatory intervention, another source of opacity for investors.

Patterson admitted as much, saying in a presentation that “these investments are not without risks. They are long term investments with difficult economics.” Yet executives repeatedly sought to drill home how essential Openreach is for future prospects, as this line in its statement shows:

“The company aims to have a single integrated all-IP fiber network that enables seamless converged access across fixed, WiFi, and mobile.”

There are plenty of big telecoms companies that offer good customer service without owning the networks. The difference is that for BT, Openreach has been its cash cow. It generates 19 percent of revenue and 31 percent of operating profit. That contribution is declining, though, and politically-pressured network spending is eating into profit margins. Plus there’s the threat from nimbler “alternative network providers” such as CityFibre. 

Du Plessis said on Thursday that “you do not build great businesses by being fussed about tomorrow morning’s share price.” That’s true, but the company should remain open to alternatives for Openreach should the regulatory environment remain difficult or get worse. Investment will be necessarily high to address justified complaints about service and speed of rollout. But there’s a limit to what the company can afford.

While selling a stake in Openreach – which regulators have already demanded be legally separated – is unlikely in the short term, it shouldn’t be out of the question. A big divestment could plump up BT’s coffers, while putting the investment demands on the new spinoff. Patterson says he’s confident that regulators have a better understanding of BT’s constraints, but politicians have little patience with the company – just like investors. Building a proper fiber network for Britain is a monumental task. Why not leave it to someone who’s focused fully on the job.

To contact the author of this story: Alex Webb at awebb25@bloomberg.net.

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