ALEX BRUMMER: Bid threat looming at BT

Philip Jansen may face another challenge before he hands over his position as BT CEO to Allison Kirkby at the end of this year.

Aggressive cost cutting and stronger prices have reversed BT’s revenue decline in the last quarter.

But questions remain about future ownership. A standstill agreement preventing French-Israeli telecom investor Patrick Drahi from using his 24.5 percent stake to make a bid ends on November 24.

Drahi is currently dealing with significant losses, so is unlikely to walk away without exploring ways to unlock value.

He may not be the only impatient investor. Deutsche Telecom has a 12 percent stake in the group, a holdover from BT’s £12.5 billion takeover of mobile group EE in 2016.

Investors across Europe are trying to extract value from the telecom sector. This week, in the first phase of the restructuring, Vodafone’s new boss Margherita Della Valle agreed to sell its Spanish arm to British takeover firm Zegona Communications for £4.4 billion.

Last month, Saudi Arabia’s STC announced that it had acquired a 9.9 percent stake in Spain’s Telefónica, owner of the British O2 network.

The government in Rome has spoken out in favor of private equity magnates KKR taking a 20 percent stake in Telecom Italia.

Fierce competition in mobile phone markets and weak margins in fixed line and broadband have helped push national telecom companies into the game.

If Drahi were to decide on his own, or through an agreement with Deutsche Telecom, that the time was right for a full or partial bid for BT, it would put the government or its successor in a difficult position.

Current relatively high interest rates would make the economics of a leveraged buyout difficult for BT. But a relatively weak share price makes it an attractive asset.

The government would have to exercise oversight under the National Security and Investment Act in the event of a bid for such a strategic company. They could be concerned that efforts to deliver fiber broadband to every door in Britain could be interrupted.

Watertight guarantees about future investments in broadband would be needed.

The most serious obstacle could well be the BT pension fund. The Pension Protection Fund has in the past seen the problems of BT pension funds as the biggest potential risk it could face.

The BT pension fund is estimated to have a solvency deficit of £11.6 billion.

Directors and regulators would be concerned that the new owners’ covenant, especially in a leveraged deal, would not be strong enough and would require corrective action.

Jansen has shown that BT can become more profitable.

BT’s market value of just £12 billion means a full bid is beyond the imagination.

Shopping switch

The struggle of British listed supermarkets continues.

Shares in Sainsbury’s perked up after it forecast higher profits for the year. Lower prices for key items and a high-quality offering have made it possible to regain market share from German discounters Aldi and Lidl.

Sainsbury’s and market leader Tesco could also benefit from tensions at private equity-controlled rivals Morrisons and Asda. The rise in interest rates across the Western world has increased financing costs for buyouts.

Both Asda and Morrisons changed hands when they were bought at peak valuations when interest rates were low. That limits the ability to match prices with low-end retailers, and market share has shrunk.

Less comfortable for CEO Simon Roberts and Sainsbury’s may be its ownership. During the pandemic, Qatar’s stability as a cornerstone investor at 25 percent may have been reassuring.

While Israel and the US move to crush Hamas and cut off its financial support, the Gulf state is in the headlights for support for Gaza.

Inspector calls

Every child and teacher in England and Wales knows they have to be on their best behavior when Ofsted calls.

Imagine what the nine members of the Bank of England’s rate-setting monetary policy committee (MPC) must have felt during this week’s two-day meeting.

In the corner sat Nobel Prize-winning economist and former US Federal Reserve Chairman Ben Bernanke, invited by the Court, the Bank’s board of directors, to discuss the Old Lady’s MPC homework and forecasting skills. Scary things!