We use cookies to improve site performance and enhance your user experience. If you'd like to disable cookies on this device, please see our cookie management page.
If you close this message or continue to use this site, you consent to our use of cookies on this devise in accordance with our cookie policy, unless you disable them.

Close
2 FREE PAGES remain this month
or
for more website access

You can view 2 more articles. Please register to view this article, or subscribe for share tips and full online access.

BT/Ofcom deal could level telecoms playing field

BT/Ofcom deal could level telecoms playing field

If company regulation was a game of Monopoly, BT (BT.A) has just been given a 'get out of jail free' card. The telecoms giant has reached an agreement with Ofcom to spin out its Openreach division into a separate legal entity that will remain under BT ownership.

The agreement comes after two years of discussions between BT and the UK's telecoms regulator regarding the ownership of Openreach. The division, which owns and operates most of the UK's network of broadband cables, has been widely criticised for its slow connectivity. Customers have complained that BT has shirked on investment in Openreach in favour of big content spending (including its recently renewed £1.2bn contract to broadcast UEFA Champions League football). Meanwhile, BT's rivals - which rely on Openreach to transmit their own broadband - have suggested that BT has too much control over the sector.

For BT's shareholders, news of the agreement came as a relief and the share price rose 4 per cent on the day of the announcement. Chief executive Gavin Patterson was also pleased: "[The agreement] is good for BT as a whole," he told analysts on a conference call. "There will be more consultation regarding how to invest and create good business practice."

For BT's shareholders, news of the agreement came as a relief and the share price rose 4 per cent ”

This should be good news for the group's competitors. Openreach will have to consult with its wholesale customers including Sky (SKY), TalkTalk (TALK) and Vodafone (VOD) on large-scale investment plans. The companies are likely to push for upgrade work, including wider deployment of fibre connections to replace ageing copper telephone lines.

Roddy Davidson, an analyst at Shore Capital, thinks the agreement will also give Sky a competitive advantage when it comes to TV content. "Financially it will be a big ask," he said, in reference to the potential for increased investment demand at Openreach. This would have "a knock-on effect on [BT's] content," he said.

Under the terms of the agreement, 32,000 members of BT's staff will be transferred to the new Openreach, which will be led by an independent chief executive and new chairman. But business and investment decisions will ultimately remain under the control of the BT board. They will have the ability to "overthrow" investment decisions made by Openreach management, Mr Patterson said. Concerns therefore remain regarding BT's commitment to investment in improving the broadband network. Tom Mockridge, chief executive of Virgin Media - which owns its own network of broadband cables - was particularly disparaging: "Call it what you will but it's still BT, four times slower than Virgin Media," he said in a statement on Friday. Virgin Media - the only BT rival not to rely on wholesale access to the telecoms giant's infrastructure - previously launched a joint advertising campaign alongside BT, talking up the quality of the UK's internet infrastructure.

As the sole owner of the new company, BT will also retain control of Openreach's bank account. That is good news for the company as the division contributed 40 per cent of group adjusted cash profit in the year to December 2016.

Crucially for BT, Ofcom also agreed that it can retain full ownership of the network assets. The company feared hundreds of millions of pounds of extra costs if it had been forced to transfer the assets as well as the staff into a new company. Ownership of the assets was "a red line for us", said Mr Patterson, as it could have caused severe issues for the pension fund. According to BT, full asset separation would have undermined the pension covenant and trustees of its £50bn scheme would have demanded bigger annual top-up payments. Credit rating agencies could also have downgraded BT if it had lost asset ownership, making its debt more expensive. According to an analyst at Goldman Sachs, the agreement is therefore "a big relief for BT".

IC VIEW:

Two years of discussions between Ofcom and BT have resulted in little real change, but for now the agreement seems to have satisfied everyone. None more so than BT's shareholders, as full separation of Openreach would almost certainly have resulted in a lengthy legal battle. That would have been particularly unwelcome at a time when BT is already under fire following the revelation of major accounting anomalies at its Italian business. In being allowed to retain full ownership of Openreach, it's easy to argue that BT has got off lightly. But Ofcom will continue to monitor the business and if BT fails to up its investment in Openreach, the regulator could enforce stricter measures. Hold.

Last IC View: Hold, 310p, 9 Feb 2017

visible-status-Standard story-url-BT_news_130317.xml

By Megan Boxall,
13 March 2017

Print this article

Related Companies

Advertiser reports

Register today and get...

Register today and get...
Please note terms & conditions apply