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There always seems to be a reason BT’s investors are kept on hold. Strategic mis-steps, operational challenges, a hypercompetitive sector and a noisy shareholder roster have kept a lid on the stock, which is languishing 15 per cent below where it was 5 years ago. The UK telecoms group’s long-suffering holders may finally be reaching the front of the queue.
A massive signal distortion has been removed. With Patrick Drahi’s overextended empire needing to sell assets to reduce debt, investors had feared that his 24.5 per cent share in BT — worth £3.4bn at current market prices — would be dumped on the market. Indian conglomerate Bharti’s acquisition of the entirety of Drahi’s stake — in stages, upon receipt of regulatory approvals — does away with this overhang. It also leaves Drahi with a loss of around £900mn on his investment, according to NewStreet Research estimates.
BT still has plenty of telecoms investors in its shareholder base. Following the completion of the transaction, 40 per cent of its capital will be held by Bharti — which also holds Bharti Airtel — Deutsche Telekom and Mexican investor Carlos Slim. A full takeover could be challenged by regulators, and Bharti said it does not intend to make an offer. Still, M&A rumours will inevitably swirl.
The presence of these savvy, long-term telco investors is apparently a vote of confidence in BT and its strategy. The trouble is it isn’t the first one. Drahi’s 2021 acquisition, too, was touted as a buy signal. Yet had investors followed in his footsteps they would be nursing a significant loss.
This time around, however, BT could manage a better connection. This has nothing to do with abating competitive pressures in the beleaguered telecoms sector. Indeed, BT is still losing customers for its broadband offering, as alternative network providers compete on price.
Rather, the company is further on in its investment cycle — something that has helped the valuation of some European peers. BT is pouring capex into its fibre network, up to £4.8bn this year alone — an undertaking that rattled investors given the sector’s poor returns on capital. Spending is now falling and is expected to be £1bn a year lower by 2030. Mathematically, this should lift free cash flow by two-thirds, even if the business does not improve. The company targets a doubling, hoping to throw some ebitda growth in the mix.
Many telco investors have suffered waiting for sector growth. But an equity story simply based on rapidly growing cash flow plus supportive shareholders has a nice ring to it. Shame Drahi was disconnected because he ran out of credit.
camilla.palladino@ft.com
