The surprise purchase of 12.1 per cent of BT (BT.A) for £2.2bn by Altice, France’s second-largest telecom company controlled by tycoon Patrick Drahi, revived the market’s interest in the company’s flagging share price. The shares rose 8 per cent on the back of the announcement. The deal makes Altice BT’s equal largest shareholders alongside Deutsche Telekom (DAX: DTE).
The intriguing point is that Altice has not positioned itself, at least publicly, as an activist investor and its statement made clear that BT’s current management, along with the latest turnaround plan, has its full confidence. Any notion that Altice might attempt a full takeover was also squashed.
The irony is that an activist investor might be what BT really needs. Though having shed its image as the telephone arm of the civil service a long time ago – according to former employees, the overmanning was so bad that the company was able to phase out 100,000 jobs, without having to resort to any compulsory redundancies whatsoever - the past 20 years have seen a succession of management teams and turnaround plans go awry.
There have been many missteps: In no order, a huge accounting scandal in its Italy division, a long litany of complaints over its basic customer service and a foray into buying up football rights. During most of that time, competitors have been eating into BT’s share of the crucial broadband market. Analysts at Numis have raised particular concerns that the “AltNet” system of telecoms infrastructure that isn’t controlled by BT is now in a position to start taking wholesale business away from Openreach; capital expenditure by these companies is forecast to top £2.1bn a year by 2022, according to Numis.
The fundamental cause of the malaise is not hard to diagnose. According to research from Statista, BT’s bedrock fixed line business is in consistent decline. This was generating around £1bn of revenue every quarter for BT in 2012, but has fallen by 20 per cent to just over £800m over the past six years, the consultancy said. That said, it still retains a dominant 38 per cent of the UK fixed-line market, but without consistent growth in broadband the company risks being stuck on a “burning platform.” This is what the current turnaround plan, with its emphasis on rolling out a superfast fibre network, is supposed to address.
It is no surprise, then, that the share price has drifted over past half-decade from 400p to its current level.
What does Altice want with a BT stake?
Under the takeover code, Altice cannot make an unsolicited offer for six months without the permission of the management and won’t be offered a seat on the board, so investors will have to adopt a 'wait and see' approach before Altice potentially lays out its stall. In the meantime, BT’s management will probably get the time it needs to oversee the fibre roll-out.
Altice can probably afford to wait. At a likely buy-in price in the range 175p-180p, Altice has not exactly overpaid for the shares – BT floated on the stock exchange 38 years ago at 130p a share and analyst consensus places them in the bracket of “moderately underpriced” at a forward price/earnings (PE) multiple of for 2022 of 9.6. In summary, shareholders should probably not become too exuberant on the back of the news. Many of BT’s problems are the result of simply being a big player in a changing market with a declining legacy business. But the entry of Altice gives the situation an excitement that was lacking before. Buy at 189p.
