Investment bank backs the BT waiting game

Don’t expect BT to give too much away over the next couple of months, but investment bank Jefferies thinks there is enough there to make the telco a good bet.

The arrival of new BT CEO Philip Jansen has sparked the prospect of the telcos revival, at least from a share price perspective, though Jefferies believes cards will be held very close to the chest for the moment. Don’t expect too much insight on future strategies over the near-future, but the foundations seem steady enough to put BT in a solid position.

The last few years have not made for comfortable reading for many BT investors. In November 2015, share price stood at £4.99. This was not a historical high, but it was a peak in recent memory. Since that point, share price has declined 56% after gains from EE remained elusive, the Openreach position was challenged and a disastrous entry into the content game. Under former-CEO Gavin Patterson, BT entered a slump.

That said, in January BT reported positive results, suggesting the restructuring process implemented over the last 12 months was setting the foundations for recovery. Jansen was entering a business which was in a reasonable position.

“BT welcomes its new CEO with foundations to build on, not a slate to wipe clean,” the Jefferies investor note states.

However, with Jansen’s first earnings call just weeks away, don’t expect too much insight on BT’s future strategy. With Ofcom’s Access Review still yet to see the light of day, it would be “illogical” for BT to make too much of a commitment in the near future.

Depending on the outcome of this review, there might be room for Openreach to consider premiums on FTTP, there might be demands to increase CAPEX, there might be a need to cut Dividend Per Share (DPS). There are too many maybe’s floating around the regulatory uncertainty created by government ambitions to fibre-up 15 million UK homes by 2025.

While there is a suggestion DPS growth might freeze or reverse, this could allow BT to redirect funds towards the CAPEX column at Openreach. This could assist the telco in creating a friendlier relationship with Ofcom, an outcome which would be beneficial for everyone involved.

Jefferies feels there are too many unknowns for the telco to make any concrete commitments moving forward, but in encouraging customers to Buy BT, there is seemingly a lot of confidence.

Regionalised monopolies or all-out competition? That is the question

It is always better to be a leader than a chaser, but sometimes you play the hand dealt. The UK is playing catch-up, but what is the right way forward; regionalised monopolies or bitter battle for the consumer?

This is a question which was addressed by Minister for Digital and Creative Services Margot James at the Connected Britain event this morning, and is currently being investigated by those running the Future Telecoms Infrastructure Review. The idea is to strike a balance between the two, but that is much easier said than done. Sitting on the fence, appeasing all contributors, is never a healthy situation.

As you can imagine, there are pros and cons for both sides. On the monopolistic side of things, the telco would be confident of capturing customers and therefore generating ROI. The rollout would be notably faster due to the guarantee of customers, either through direct-to-consumer services or wholesale, but then there is a risk of another Openreach saga being reached.

Looking at all-out-competition, the consumer wins as there would be a heated battle on price and performance to capture revenues, but deployment will be much slower. Telcos would have to spread investment further over different regions, while also not having the same level of confidence in securing revenues.

There are of course other options, collaborative investments in networks is one which springs to mind, though we are not entirely confident in the telcos ability to place nice with each other. The Future Telecoms Infrastructure Review will provide more insight, but the government is staying suitably tight lipped there.

“We are a matter of weeks away from delivering the review, I have the unenviable task of telling you the government’s view without telling you the government’s view,” said Raj Kalia, CEO of BDUK, the government department responsible for overseeing the deployment of future-proofed infrastructure.

While there was very little of substance said at the conference, pertaining to the review that is, we got the impression the government will be leaning more towards the network sharing model. This will be the telecoms version of herding cats, but perhaps is one of the most sensible. Investment risk for the telcos is reduced, while there is still the opportunity to monetize. Depending on how the government intends to ‘stimulate’ deployment, there might still be an element of regionalised monopolies, but with multiple telcos contributing to the rollout, risk is reduced for the consumer on the other side of the coin.

One comment was directed towards the UK’s fantastic ability to conduct investigations and reviews, as a substitution for genuine action, but all eyes will be directed towards the Department of Digital, Culture, Media and Sport, as well as the much lauded Future Telecoms Infrastructure Review over the next couple of weeks.