BT Could Sell Openreach Stake to Fund £12bn UK Fibre Rollout
Reports claim that BT could be looking to sell a significant stake in Openreach to investors as part of a strategy to help fund their £12bn roll-out of 1Gbps capable Fibre-to-the-Premises (FTTP) broadband ISP technology, which has set an ambition (here) to cover 20 million UK premises by the “mid – to late-2020s.“
The trouble with BT Group’s new plan is simply, how to fund it? The operator may be big but their entire market value is only around £10bn and then we have to consider £50bn in pension liabilities, £18bn in net debt and the £1.3bn needed over the next 5 years as part of their restructuring exercise.
Some of the funding will surely come from the company’s “difficult decision to suspend the dividend until 2022,” but that will only bring in c.£2.5bn. Meanwhile we can probably expect the operator to secure a good chunk of the Government’s proposed £5bn programme to help extend “gigabit-capable broadband” to every home by the end of 2025 (focused on the final 20% of hardest to reach premises), but that still isn’t enough.
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According to the FT (paywall), the telecoms giant is reportedly considering the possibility of selling a stake in their Openreach division to investors. Quite how this would work is unclear since Openreach is a heavily regulated business that is also “legally-separate” with its own independent board, although they’re still bankrolled by BT.
The network could probably also be considered a strategic national asset by the government, which means that any direct investment may attract scrutiny from the both the competition (CMA) and telecoms regulators (Ofcom). Such a deal might also have a wider political dynamic that is hard to predict and there’s the on-going uncertainty around an EU trade deal to consider.
The report suggests that offers of a potential sale of a stake in Openreach value it at £20bn, which is roughly double BT’s current market value and would certainly solve their funding problems. At the same time fibre optic networks remain a generally attractive proposition for big investment firms and the chance to grab a big chunk of the UK’s largest telecoms network is one that several firms will at least want to explore.
The original report points to three sources as claiming that BT have, over the past three weeks, held talks with both Australian bank Macquarie (they most recently spent big to gobble KCOM in East Yorkshire) and an unnamed sovereign wealth fund, which given the COVID-19 lockdown would probably have only been very limited.
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However an article on Reuters, which claims to have spoken with a source close to Macquarie, reports that the investment giant has NOT expressed an interest in Openreach and hadn’t held talks with BT. Alternatively this could be an early attempt by people within BT to drum up some interest in the idea within the market. The UK market for “full fibre” broadband is certainly anything but boring but take this one with a pinch of salt, for now.
Mark is a professional technology writer, IT consultant and computer engineer from Dorset (England), he also founded ISPreview in 1999 and enjoys analysing the latest telecoms and broadband developments. Find me on X (Twitter), Mastodon, Facebook and Linkedin.
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Ah OK the plan makes a little more sense now.
The biggest issue will be how the pensions regulator sees it.
OR is the cash generative bit of the business. And there is a pensions deficit. A smaller % of OR owned by BT means less flowback. Balance that off with no investment no return there will be an allowable sweet spot.
This would never have come to pass if BT had started serious FTTP 10 years earlier. And stopped milking OR to pay for loss making foreign ventures all over the place.
The fact that it is a chunk of OR they are looking to monetise points me towards there being a few smelly thing hiding in the BT carcas that make it less investable.
All makes total sense now with the signal share purchases from senior management.
The FT article actually specifies that the sale of a stake could value the entire Openreach business at £20bn, not the small stake they are discussing purchasing. Quite a big difference…
Valuing the whole business at £20Bn is totally different to selling 20Bn of the business.
Personally I see it as worth more than that given present investment rates in FTTP. OR has a lot of physical assets already with the duct/pole/PCP/DSLAM network with established power connections.
Looking at my notes from 2001, I was “pitching” to be an advisor into the Earthlease consortium. Earthlease were then “targeting” the OR local loop, which for the most part was copper and in hindsight, it may have have been better for the acquisition to take place. I’m not sure if the consortium would have looked very seriously at upgrading the local loop to fibre (reducing their costs as copper is ripped out, etc).
For those of you who know me, I’m a strong advocate of the Neutral Access Network (see https://tinyurl.com/y2orvfek) which would have been the logical model for the Earthlease consortium. It didn’t happen, the Earthlease project, that is but here we are twenty years on looking at something very similar. Que sera sera.
BT + Openreach: value £10bn
Openreach on its own: value £20bn
Net value of BT: -£10bn
BT shareholders better hope they don’t get left with that bit 🙁
That is Denis Thatcher business maths……
When he famously said BA was bust and it wasn’t!!
A_Builder
Yes you are right to a certain extent but it does show where most of the value in the BT business lies.
Many of the other BT services units are being propped up by Openreach income.
I think if you split the two businesses you would initially find the combined market capitalisation would be greater than the current BT market capitalisation. But Openreach shares would climb and BT shares would sink over time. So I know which shares I would rather have.
BT’s shareholders would probably quite like the fact that the company has a much smaller pension obligation and reduced debt to deal with – Openreach will have to take all of that on
Would certainly be a very messy divorce
@Ivor
Which is why it can only ever be a minority stake in OR that is sold.
Otherwise the regulatory mess would be overwhelming.
A_Builder – presumably a partial selloff would have the same issue?
Would hardly be right and proper to turn Openreach into a joint venture where one partner holds all the liability – it would have to be shared
The latest results from BT state
————
Pensions (Note 7 to the condensed consolidated financial statements)
The IAS 19 pension position at 31 March 2020 was a deficit of £1.0bn net of tax (£1.1bn gross of tax), compared with £6.0bn net of tax (£7.2bn gross of tax) at 31 March 2019. The decrease in the gross deficit of £6.1bn since 31 March 2019 mainly reflects an increase in the real discount rate, deficit contributions paid over the period, and positive asset returns.
————
So the pension deficit is a lot less than it was – though the current market falls will have increased it somewhat over the past few months.
As for Openreach propping up the rest of BT – Openreach’s returns are regulated … so they actually make much more money from the non-Openreach parts of the business than they do from Openreach
@sunil Sood
“As for Openreach propping up the rest of BT – Openreach’s returns are regulated … so they actually make much more money from the non-Openreach parts of the business than they do from Openreach”
Openreach is by far the most profitable part of the BT group. Let’s look at the unit results for the year ending 31 March 2020, first figures are revenues with EBITDA in brackets.
Consumer £10,388m (£2,426m)
Enterprise £6,093m (£1,965m)
Global £4,361 (£634m)
Openreach £5,112m (£2,858m)
It’s the EBITA you need to be careful of.
Earnings before interest, taxes, depreciation, and amortization
Guess which part of BT has the most depreciation and amortisation etc..
I smell panic in the air. Who would have thought this would even be imaginable 10 years OK. Well done the Altnet community you have pretty much shaken BT to its core.
Has BT lost its number one position? Personally I think it needs to happen.
However if BT can sell a stake in Openreach then it can sell Openreach. It should now be separated from the BT organisation. I cannot see how they can argue to the regulator that it would not be possible.
One issue for BT is timing. How long would it take to complete a transaction like this? Easily a year and probably two and possibly more if the regulator gets involved. By then competition would have increased even more.
What a load of tosh. Bt is there largely due to its pensions liability. Its not altnets thats pushed this move.
Joe is that another name for BT CEO. You can try and deflect the truth all you like but it is that kind of tunnelled vision that has led to this mistake.
It is as a result of a strategic blunders and greed. If BT weren’t paying tens of billions in dividends (to help other people’s pension companies) and instead have invested in their network plus paid down the pension deficit for their own employees benefits then they would be in this mess.
If you think the Altnets and their backing by huge investment funds haven’t knocked the prospects of BT you are leaving on a different planet.
Funds like Macquarie and KKR could buy BT with their lunch money. But they have been backing Altnets up until now. Too much baggage with BT. But they might be interested in an Openreach without the baggage.
So Mr BT wake up and smell the coffee. You are about to be taken over or lose your top spot in the UK telecoms market.
Err that should have read ‘not be in this mess’
Maybe you should have both hands at the keyboard ;o)
“If you think the Altnets and their backing by huge investment funds haven’t knocked the prospects of BT you are leaving on a different planet. ”
Sounds more like a repeat of the 90s to me, when the cable TV franchises (and their rich backers) talked a big game about how they’d ruin BT and Sky. Or the wireless local loop firms who thought that we didn’t need wires at all.
I wonder what happened to them…
The difference these days is the likes of CityFibre and others are directly competing on the same technology as BT/OR.
Without these fibre alt-nets we’d have still been getting the old reply when fibre was mentioned “what do you need that much speed for?”.
Not a great argument Gavin – the cable companies had a massive technical advantage over BT and Sky – two way coax could do a lot more than satellite and ISDN (if you could afford it). That advantage still exists today given that Virgin can offer faster download speeds than any FTTC ISP.
If they couldn’t win when they had such a clear open goal, why would you think that they can win when they are using the same technology as their much larger and vastly better resourced competitor?
OMG ‘leaving on a different planet.’ Perhaps that should have been living. Although could be right
“we can probably expect the operator to secure a good chunk of the Government’s proposed £5bn programme”
Let’s hope not! It’s a big mistake throwing any good money at BT. If anything, the pensions fund needs to be sorted out by the goverment, and for BT then to be disolved. A tragic story story, yes, especially for the shareholders, but they knew the risks.
BT can do more for less than anyone else.
I have no idea what you think the taxpayer bailing out and ‘dissolving’ BT would accomplish.
BDUK was on-time, under budget, loaded all the risk on BT and resulted in £100ms of gainshare being handed back to local authorities to reinvest. It’s probably more successful than any other UK public private partnership in history. But sure, give it to another company with no real track record, interest or capability.
The last time I checked the government has no share in or control of BT Group plc. So why on earth should the government bail out BT’s pension fund which probably has a deficit of over £13bn.
@Roger G
The BT pension fund has a Crown Guarantee.
So HMG is on the hook for any pension liabilities.
Indeed there is the Crown Guarantee for funding the BT Pension Scheme in the event of insolvency. What I meant is that I most certainly don’t want the government doing any sorting out whilst BT is still viable (which it most certainly is). Furthermore if any part of OR were to be sold off then surely part of the pension deficit needs to be apportioned to OR.
@CarlT: “BT can do more for less than anyone else.”
Are you joking? Do you really believe that? If BT was so great why then was it other companies in many rural, and sometimes even in urban areas, building fibre networks rather than BT? And for many other areas BT only started network deployments (VDSL mostly, not even fibre) after this beggar received taxpayer’s money. We all saw how quickly the gainshare mechanisms kicked in because of higher than anticipated demands which was to be expected. BT never had any needs for public money in the first place! Especially not for such a poorly managed company.
As regards the pensions burden: It is mainly BT, through poor management and bad decisions, who has been responsible for mess.
G newton – disinformation as ever
BT only started network deployments (VDSL mostly, not even fibre) after this beggar received taxpayer’s money.
Relaly commercial plan on 1.bn announced in 2009 increast to 2.bn announced in 2011 BDUK not started any procurement until late 2011 with no contract is think before 2012 at earliest – you dates and number are wrong as ever – buts lets not allow the facts to get in the way
DUK was on-time, under budget, loaded all the risk on BT and resulted in £100ms of gainshare being handed back to local authorities to reinvest. It’s probably more successful than any other UK public private partnership in history. But sure, give it to another company with no real track record, interest or capability.
theose other BDUK contracts (not involving Openreach) have done so well and delvieredd son many premises early (because it so easy to deliver large infrastructure projects – not)
@Fastman: If you quote then please do not do it out of context. To repeat:
“for many other areas BT only started network deployments (VDSL mostly, not even fibre) after this beggar received taxpayer’s money”
I wasn’t talking about it’s so-called commercially viable deployment areas. I was responding to the misleading claim that “BT can do more for less than anyone else.” which simply isn’t true. Despite all the unfair advantages BT has had, there are quite a few cases where other network companies have successfully built fibre networks in areas BT wouldn’t touch.
As has been discussed in other ISPReview articles, this country is years behind where it should be with regards to modern telecom services.
Gnewton the commercial programme covered 66% of the uk population (you seem seem to have forgotten that in your summary and you are I think a benefit of a programme you cleary had had issued with from day 1 – BT and begging Bowl – (so that public procurement, matched investment (in line with aid intensity) and Gainshare (where take up exceeds) –
no one was going anywhere in those other 1/3 of the population (and some of those wont even still get coverd unless the resident contributes aboue the USO threshold
@Fastman: It’s amazing how much of an BT admirer you are! Are they paying you? Do you sell fibre lines? And no, we never used BDUK-funded FTTC.
For most people is it obvious that BT over the past 2 decades has done a poor job, this country is way behind of where it should be. Wrong policies for too long!
This sounds quite unlikely.
Desperate times and all that…. but I think it’s about time the two were separated anyway, perhaps then OpenReach can be more reaching in its scope and won’t be seen as such a monopoly?
Yeah, because that makes sense – be more reaching in scope at the same time as appearing less like a monopoly.
The smell of desperation trying to flog a dead horse for more than it is worth.
As someone who works for OR today this has been proven to be FAKE News confirmed by CEO
Look back on archives on this site. Everyone said this would happen. And so it comes to pass. BT hoover up content and mobile, and throw openreach to the dogs after leaching the assets for an extra decade.
Let’s see it confirmed by BT
@CD
Already known to be false before you posted your comment Chris, so both you and the other harbingers of doom were all misinformed when stating words to the effect of you knew that this would happen.
Maybe I’m missing something but it doesn’t make sense to me.
Why would you sell your stake in something then plough that money back into something you don’t own anymore when you are no longer on the hook for a rollout anyway , as you don’t own it anymore anyway?
Sound like a media frenzy
My heart sinks when I see a BT/Openreach story with dozens of comments. It’s always the same tired old corporate bashing, much of which seem to come from people with entrenched views and little understanding of the business world. Buck up chaps, let’s have a more constructive discussion please.
And if I follow by own advice, I won’t be reading any follow-up… 🙂
Some of us do have our tongues firmly wedged in our cheeks; at least some of the time.
Look at the last line of my leading comment for a clue………
Fake news
https://www.telegraph.co.uk/technology/2020/05/15/openreach-boss-denies-stake-sale/
While this project of selling off chunks of Openreach probably won’t happen, the reason it caused such excitement in the public is because most people regard telecoms as a utility, just like water or electricity (see e.g. https://telecoms.com/486104/everyone-thinks-telcos-are-utilities-except-the-telcos/).
However, things got messed up in this country for too long due to the incompetence of both BT and failed government strategies, as is evident today because the majority in this country still cannot get a fibre broadband service. Openreach should have been separated from BT ages ago and be treated like a utility.
I think it was only yourself that was excited.
Oh well you’ll just have to keep dragging them down through online posts until you get want you want.
@FibreFred: You should have at least read the article in the given link as it clearly says there this:
“nine out of ten correspondents, all of which were UK consumers not necessarily industry figures, perceive their telco provider as a utility.”
Just because you are the odd exception doesn’t change the perception of the majority of consumers who rightfully expect a working telecom service, just like electricity or water. I know this hard to understand for the hardcore BT fans here!