The dividend’s been scrapped and there’s a TOWERING pension deficit, but bidders are circling: Is it worth hanging on to BT – or time to hang up?
Struggle: BT shares have fared far less well in the 21st century
Back in the early autumn of 1984, British Telecom was seldom out of the headlines. The state-owned business was about to make its stock market debut in the first privatisation, fulfilling one of Margaret Thatcher’s key policies.
The aim was to create an army of small shareholders, and to put Britain at the forefront of the revolution in telecoms and other technologies.
In that year, the first mobile phones, bulky devices with negligible battery life, appeared.
Today BT (the name was shortened in 1991) is once more in the news. But its shares have fared far less well in the 21st century than Mrs Thatcher and the champions of shareholder democracy would have hoped.
The share price has halved to 102p over the past year. Such has been the decline, bosses concede a takeover is possible.
Rumoured bidders include KKR, the private equity outfit that starred in Barbarians At The Gate, the celebrated 1980s’ business book. Deutsche Telekom is seen as a less likely suitor, despite holding a 12 per cent stake.
The prospect of a consortium of bidders has caused a stampede for shares in recent days. Some even dream it could return to 470p, its level in 2016 at the time of the purchase of the EE network from former owner Deutsche Telekom.
But BT is a much more complex business than in 1984. It has a key place at the centre of national infrastructure that the Government will seek to safeguard and that will be a major consideration for a predator.
At the behest of ministers, BT is stripping technology supplied by Chinese company Huawei from the UK’s 5G network and its own mobile network.
And other costs are mounting, providing a deterrent to any bidder. BT’s final salary pension scheme, a legacy of state ownership, has a £10.1billion deficit.
The expense of acquiring football and other rights for its broadcasting arm BT Sport under former boss Gavin Patterson is also considerable.
And the company must also spend billions to remedy errors that have been exposed by lockdown.
Sluggish internet has been a source of woe for millions working from home. Many blame underinvestment by BT in its Openreach infrastructure division. Just 12 per cent of British households have superfast full-fibre coverage: it is 80 per cent in Spain.
Openreach maintains every part of the UK’s phone and broadband networks. It is now redoubling its efforts to provide full-fibre broadband to millions more homes.
To help meet the £12billion bill for this, BT scrapped its dividend in May. Payment will not resume until March 2022, and will be at a lower rate.
This was bleak news for the 829,000 shareholders, many of whom have remained faithful since 1984, and also for holders of funds that have backed BT.
These include Jupiter’s UK Special Situations, which has a 3.87 per cent stake, and Jupiter Income Trust with 3.75 per cent. Many had been hoping that talk earlier in the year of a sale in a stake in Openreach would become reality.
Openreach is BT’s most profitable division, worth as much as £22billion according to some analysts, although a more conservative estimate is £14billion, which is still larger than the whole group’s current market capitalisation of £10.3billion.
Splitting off a part of Openreach would be complicated by security concerns, however.
The array of obstacles in the way of a bid for BT will not stop the speculation.
Ravenscroft, the investment manager, says: ‘BT may be a national institution but it has been placed in the shop window.’
At the time of BT’s privatisation, former prime minister Harold Macmillan compared the move to ‘selling off the family silver’, but the company’s image has been tarnished.
If you are an existing investor, it may be worth waiting round to see if the pandemic is the moment when the business surmounts its problems.
Buying the shares in the hope of a bid may require the kind of patience that thousands of broadband customers have had to learn during lockdown.