Why it’s good to talk about telecoms giant BT

The ending of hit TV series Succession has left a gap in the lives of those who love a tale of boardroom intrigue. The events at BT may seem a poor substitute.

But excitement may be in store at this company – good news for its 800,000 or so small shareholders, some of whom first invested during privatisation in 1984 and have, in recent years, not enjoyed much fun.

Patrick Drahi, the billionaire French boss of Sotheby’s and the French telecoms group Altice, has now increased his stake in BT Group to 24.5 per cent in an apparently strategic move that has sparked intense speculation.

BT, whose slogan used to be: ‘It’s good to talk’, is now being talked about in a more positive fashion, even though mystery man Drahi, who loves maths and the art of Matisse, says that he does not intend to bid, unless there is a board recommendation or an approach from a third party.

Does he trust in the pledge from BT chief executive Philip Jansen that the business is on its way, through ‘pain’, to become a ‘totally different company’?

Star combination? Patrick Drahi (right) and BT boss Philip Jansen

Thanks to such statements, the shares have risen by 28 per cent to 143.65p since January, although they remain 50 per cent down over a decade – and below their level of June 2021, when Drahi began to accumulate his holding in BT, a household name utility that rose to power as the provider of landline phones.

Today it is best known as the owner of EE, the mobile operator and of Openreach, the biggest player in broadband. Its BT Sport division is now a joint venture with Warner Discovery.

Openreach is rolling out full-fibre connectivity across the UK, aiming to serve 25m premises by 2026 by building ‘like fury’, another Jansen pledge. While vastly expensive, the roll-out will attract 100 per cent tax breaks and, when completed, it could double free cash flow (FCF), according to Enders Analysis. FCF is a key telecoms sector metric.

Openreach faces competition from Virgin Media and upstart ‘AltNets’ like Hyperoptic, and some analysts also dispute whether any telecoms company engaged in long-term infrastructure investment should even be publicly-quoted.

But such is Openreach’s importance to national security that the National Security and Investment Act would block an attempt to take BT private, or an approach from a foreign bidder.

If you are one of those small shareholders, should you wait until the benefits begin to flow from the full-fibre roll-out and cost savings?

BT aims to shed 42 per cent of its workforce by the end of this decade, replacing some with AI. Should you even be considering adding to your holding?

Tim Hottges, the boss of Deutsche Telekom, may regret acquiring a 12 per cent stake in BT in February 2015, when the average price was 434p, but he has intimated an interest in buying more, further fuelling the gossip mill. Sticking could well be worthwhile. After all, James Barford, of Enders Analysis, says Drahi seems to have every intention of doing so, having learnt patience from his experience of full-fibre roll-outs in France and the US.

Barford comments: ‘BT is on a journey, but it is a journey that has been well mapped out.’

Openreach could lose a little of its market share to Virgin Media and the AltNets, but inflation-linked price rises should compensate for that. Meanwhile, if customers such as Sky and Vodafone agree to use full-fibre rather than legacy copper systems, they will enjoy lower prices under the Equinox 2 scheme.

Matthew Dorset, an analyst at Quilter Cheviot, contends that the AltNets may not have BT’s staying power, as higher interest rates have made their debt burden more onerous.

Dorset comments: ‘BT has a long-term vision to maintain its position as the leading 5G and fixed network provider.

‘Given the turnaround in the past 12 months, we would consider the business to be somewhat of a bounceback story, undervalued compared to its peers.’

He adds: ‘It could be that Drahi sees BT as a bargain at its current price, although it is unclear exactly what his objective is. I don’t think anyone is sure.’

Drahi’s plans are a matter of conjecture. Yet Openreach is regarded as the object of his desires, because it is seen to be hugely undervalued. BT’s market capitalisation is £14.75billion.

But Openreach is estimated to be worth £23billion as a separate entity, even on a conservative basis, with some even citing £40billion, given that full-fibre is a superior technology, cheaper to maintain than copper.

Analysts have set an average target share price of 192p, suggesting BT could deliver. The dividend yield of 5 per cent presents a persuasive argument to buy more shares, especially as transformation could significantly boost this return.

Few will, I think, be going online, relying on the services of Openreach, to see who could play Drahi or Jansen in a drama based on the goings-on at BT Group. But small shareholders will be hoping that they can be a star combination.

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