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Without football can BT’s share price reclaim its highs?

BT is returning to its roots as a telecoms giant. Here’s what it means for shareholders.
April 30, 2021
  • BT has confirmed that it is in early stage discussions with potential buyers of its sports division
  • The company spends just over £1bn a year on football alone. Without the sports division it can redirect those funds into more profitable ventures

The coronavirus pandemic has had many silver linings for BT’s (BT.A) shareholders. Some will argue that the highlight has been Britain’s sudden spike in internet usage - a boon for the company which directly supplies 25 per cent of the UK's at-home broadband and provides the infrastructure for most of the rest of the nation’s providers. 

For others it will be the government’s super deduction, which will allow the company to offset its significant capital expenditure against its tax bill. And there are surely many investors who appreciate the way management hid its long overdue dividend suspension amid the FTSE’s income carnage last spring. 

But there is an argument that BT had one overarching win in the last year: confirmation via the pandemic that it does not need sport, has never needed sport and that it can, at last, sell its sport division - without the overhanging uncertainty that its absence may cause new audiences to dry up. Management has confirmed that talks to sell the sports business are in “early discussions”. 

Ever since former chief executive Gavin Patterson began building a presence in sports broadcasting, the division has been a cash-guzzling monster, costing the company an estimated £800m per year, according to Jerry Dellis, an analyst at brokerage Jefferies. The expenditure, which is largely directed towards football, has eaten away at the company’s margins: in the year to March 2020, the consumer division delivered over £10bn of revenue, but just £1.5bn of operating profits. 

Sports broadcasting was meant to be a marketing tool and was initially offered free to BT’s broadband customers. But telecoms as a service sells itself, especially in a pandemic-inflicted world where everyone is confined to their own homes. Winning new customers is about providing the best service at the cheapest price, not offering add-ons.

Without the heavy financial weight of football, the company could feasibly redirect investment into its in-demand broadband business and the high margin infrastructure division Openreach, which owns the cables, ducts, cabinets and exchanges which connect nearly all British homes to the broadband and telephone networks. The Premier League alone costs the company £975m a year in the current broadcast cycle. Redirecting that investment into full fibre connectivity would arguably have far greater long-term value.

The road back to 500p

Since its post-dotcom share price peak in 2015, BT’s fall from grace has been quite spectacular. Sales have fallen in every one of the last four years, while net profits have dropped from a 2016 high of £2.5bn to £1.7bn in the last financial year and are forecast to fall further when the company announces results for the year to March 2021 in a few weeks time. Net debt climbed nearly four-fold to its peak at the end of 2020 and now sits at over £17bn. 

But the company’s share price may have reached its nadir, climbing 63 per cent from its 100p low in October. Streamlining the business into a modern-world supplier of broadband infrastructure, a strategy pioneered by new chief executive Philip Jansen, seems to sit well with shareholders.

Reclaiming its 500p per share high will not be easy. Although the suspension of the dividend and the sale of the sports business will help trim the massive debt pile, the company still has a long way to go to get its balance sheet back into shape. Tax rebates on capital expenditure might help, but interest and debt repayments in addition to pension scheme commitments weigh heavily on the group’s ability to generate cash. The threat of interest rate hikes also looms over its debt, while the perpetual decline in broadband prices could hurt margins. 

Still, the unwieldy beast is slowly turning back into a telecoms company. And considering the importance of telecoms in today’s world, that is no bad thing. Sure, growth won’t be spectacular, but reliability is also a valuable asset for investors. Buy at 164p.