Joe McConnell
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There always seems to be a reason why BT investors are kept waiting. Strategic missteps, operational challenges, a hyper-competitive industry and a noisy shareholder list have kept the stock in check, which is languishing 15 percent below where it was five years ago. The UK telecoms group’s long-suffering shareholders may finally be reaching the front row.
A massive signal distortion has been removed. With Patrick Drahi’s overextended empire needing to sell assets to reduce debt, investors had feared his 24.5 percent stake in BT, worth £3.4 billion at current market prices, would be dumped on the market. Indian conglomerate Bharti’s acquisition of Drahi’s entire stake, in stages, once regulatory approvals are received, removes that overlap. It also leaves Drahi with a loss of around £900 million on his investment, according to estimates by NewStreet Research.
BT still has many telecom investors in its shareholder base. AVsceker the deal is completed, 40 percent of its equity will be held by Bharti, which also owns Bharti Airtel, Deutsche Telekom and Mexican investor Carlos Slim. A full takeover could be challenged by regulators, and Bharti has said it does not intend to make an offer. However, M&A rumors will inevitably continue to swirl.
The presence of these experienced and long-term investors in the telecoms sector is apparently a vote of confidence in BT and its strategy. The problem is, it is not the first. Drahi’s 2021 acquisition was also touted as a buy signal. Yet, had investors followed his lead, they would have been looking at a significant loss.
This time, however, BT has managed to manage a better connection. This has nothing to do with easing competitive pressures in the struggling telecoms sector. In fact, BT is still losing customers for its broadband offering, as alternative network providers compete on price.
Instead, the company is further along in its investment cycle, which has helped the valuation of some European peers. BT is pouring capex into its fibre network, up to £4.8bn this year alone, a feat that has rattled investors given the sector’s low returns on equity. Spending is now falling and is forecast to be £1bn a year lower by 2030. Mathematically, that should boost free cash flow by two-thirds, even if the business doesn’t improve. The company is aiming to double that, hoping to throw some EBITDA growth into the mix.
Many telecom investors have suffered waiting for the sector to grow. But a stock story based simply on rapidly growing cash flow plus supportive shareholders sounds good. Too bad Drahi was disconnected because he ran out of credit.
camilla.palladino@Vscek.com
