FTSE 350: Government and Ofcom spurring telco investment

The Conservatives have their own plans for UK internet – plans that entail spending by both the state and its telco operators. The new government wants to bring gigabit-capable (high-speed) broadband to every home and business by 2025 – and has promised to splurge £5bn to support roll-out in the hardest to reach fifth of the country.

Telecoms regulator Ofcom is helping to facilitate this ambition. On 8 January 2020, it launched its Wholesale Fixed Telecoms Market Review 2021-26, mapping out regulation that will help to ‘supercharge’ investment in full fibre, which offers much faster speeds than copper. In urban areas, Ofcom has proposed setting Openreach’s wholesale prices in a way that encourages competition from other networks as well as investment by Openreach. In more rural areas – where fewer networks can be set up – it will support spending by Openreach. It will also deregulate Openreach’s old copper products in places where full fibre is built.

The upshot for BT

What does this all mean for BT? Chief executive Philip Jansen said that the group "welcome[d] the direction" of Ofcom’s consultation, and was also encouraged by Mr Johnson's funding promise. He said: "We will continue our discussions with government, Ofcom and the industry so that we can have the confidence to significantly extend our role in this important national mission" – increasing BT's full fibre target to 15m premises "and potentially beyond".

On the face of it, that sounds like good news – at least for consumers. But shareholders may well question what "beyond" could mean for BT's investment case. Any dialling up of the group's commitment to fibre-to-the-premises (FTTP) would ostensibly put even more pressure on its purse strings – strings that are already taut with the strain of servicing its pension deficit, coughing up for TV sports rights (it recently won all UEFA rights exclusively until 2024), and ploughing money into new technology.

Vodafone has already cut

There’s an argument that BT would be better off in the long term were it to cut its payout to investors – freeing up cash not only for fibre build-out, but also for further development of services such as 5G mobile (which its EE business launched last year). The group may shed more light on its intentions when it issues a trading update on 30 January. In any case, it wouldn’t be the first telco to slash its dividend. Vodafone (VOD) did so last May, with a view to rebuilding "financial headroom", reducing its debt and deleveraging to the low end of its targeted range.

Since then, Vodafone has been busy – similarly launching a 5G offering, and completing its acquisition of assets from Liberty Global. But it hasn’t just been spending; it has also been monetising other parts of its businesses. In July, it announced that it would create Europe’s largest tower company. This new – and legally separate – entity is expected to be operational by May 2020, with the proceeds of any resulting transaction, including a potential IPO, to be put towards reducing debt.

The group also announced the sale of its New Zealand operations last year, and – in December – entered an agreement to sell its Malta division to Monaco Telecom for a cash consideration equivalent to an enterprise value of €250m (£213m). It is feasible that more such disposals might follow.