RE: Today’s Times - positive for shareholders30 Aug 2020 09:58
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Philip Jansen, who succeeded Patterson as chief executive early last year, has a positive view of the industry, having made an estimated £150m working for private equity-backed companies, including Worldpay. Some argue that public markets have become so short-termist, and private equity so well-funded, that the buyout industry once derided for opportunism now has the longer time horizon.
“You can’t be religious about it and say BT must stay exactly how it is,” said a source. “The directors are open-minded about radical options. They aren’t too fussed about who the owners are, as long as they support the plan to make BT better. If someone puts an attractive offer in, their job is to get the best price for shareholders.”
The shares may be “massively undervalued”, in the words of one insider, but that path to making BT better is a steep one — and so are the hurdles to any takeover.
Jansen has promised to connect 20 million homes and businesses to high-speed fibre broadband by the mid-to-late 2020s, from three million today, at a cost of £12bn. He has scrapped the dividend for two years to save £2.5bn, hitting the retail savers who make up most of BT’s 795,000 shareholders — a legacy of its 1984 float. When the payout comes back it will be halved to 7.7p.
Having already shed a net 9,000 jobs in two years, he is trying to cut £2bn of costs without damaging customer service. In the longer run, he wants to turn BT into a player in the emerging world of internet-connected devices, with the potential to work on drone fleets and smart cities.
That is all very well, but BT, with its 105,000 staff and state-owned heritage, is a cumbersome beast. It faces increased competition thanks to the merger of O2 and Virgin Media, and painful costs from having to remove Huawei equipment from its 5G network. The challenge of modernising it has defeated successive chief executives. “It’s a slog,” said an industry source. “You do five years and, if you’re lucky, you get out for good behaviour.”
Given the political sensitivity, any takeover would need to be a friendly deal, meaning the premium to the share price would have to be generous. Even then, it would anger many investors.
The real poison pill is the pension fund, which is going through its three-yearly valuation. The scheme, which has 290,000 members, is projected to show a deficit of about £9bn, down from £11.3bn in 2017. On that basis, BT may not have to increase annual payments from the current level of £900m. But the huge shortfall would restrict private equity’s ability to load Openreach with debt and carry out financial engineering to drive returns.
A likelier scenario than a full takeover is the sale of stakes in some subsidiaries, such as its cyber-security business. Private equity could help to grow these subsidiaries before they were spun off into separate listings. Such deals would be more easily digested than a buyout of the whole group — but in the post-Covid market
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