Why it’s good to talk about telecoms giant BT

The end of the hit TV series Succession has left a hole in the lives of those who love a story of boardroom intrigue. The events at BT may seem like a poor alternative.

But perhaps this company is in for an exciting time – good news for the 800,000 or so small shareholders, some of whom first invested during privatization in 1984 and haven’t had much fun in recent years.

Patrick Drahi, the billionaire French boss of Sotheby’s and French telecoms group Altice, has now increased his stake in BT Group to 24.5 per cent in a seemingly strategic move that has sparked intense speculation.

BT, whose catchphrase used to be ‘It’s good to talk’, is now being discussed in a more positive way, although mystery man Drahi, who loves math and the art of Matisse, says he has no intention of bidding, unless there is a recommendation from the board or an approach from a third party.

Does he trust BT CEO Philip Jansen’s promise that the company is on its way, through ‘pain’, to becoming a ‘completely different company’?

Thanks to such statements, shares are up 28 per cent to 143.65 pence since January, though they remain 50 per cent down over a decade – and below June 2021 levels, when Drahi began building his stake in family-owned BT . utility name that rose to power as a provider of landline telephones.

Today it is best known as the owner of EE, the mobile operator, and Openreach, the largest broadband player. The BT Sport division is now a joint venture with Warner Discovery.

Openreach is rolling out full fiber connectivity across the UK, aiming to serve 25 million properties by 2026 by building ‘like fury’, another of Jansen’s pledges. While hugely expensive, the rollout will deliver 100 percent tax benefits and, when completed, could double free cash flow (FCF), according to Enders Analysis. FCF is an important metric for the telecom industry.

Openreach faces competition from Virgin Media and fledgling ‘AltNets’ such as Hyperoptic, and some analysts also question whether a telecom company engaged in long-term infrastructure investments should go public at all.

But Openreach’s importance to national security is so great that the National Security and Investment Act would block any attempt to take BT private or approach a foreign bidder.

If you’re one of those small shareholders, should you wait for the benefits to start flowing from the full fiber rollout and cost savings?

BT wants to cut 42 percent of its workforce by the end of this decade and replace part with AI. Should you even consider expanding your business?

Deutsche Telekom boss Tim Hottges may regret acquiring a 12 per cent stake in BT in February 2015 when the average price was 434 pence, but he has expressed interest in buying more, which further fuels the gossip mill. Holding on might be worth it. After all, James Barford of Enders Analysis says Drahi seems to have every intention of doing so, having learned patience from his experience rolling out full fibers in France and the US.

Barford comments: ‘BT is on a journey, but it’s a well-planned journey.’

Openreach could lose some of its market share to Virgin Media and the AltNets, but inflation-related price increases should offset that. Meanwhile, if customers like Sky and Vodafone agree to go all-fiber instead of older copper systems, they will benefit from lower prices under the Equinox 2 scheme.

Matthew Dorset, an analyst at Quilter Cheviot, argues that the AltNets may not have the staying power of BT as higher interest rates have made their debt burden heavier.

Dorset comments: ‘BT has a long-term vision to maintain its position as a leading provider of 5G and fixed networks.

“Given the turnaround in the last 12 months, we would consider the company to be a kind of recovery story, undervalued compared to its peers.”

He adds: ‘Drahi may see BT as a bargain at the current price, although it’s unclear exactly what his target is. I don’t think anyone knows for sure.’

Drahi’s plans are a matter of guesswork. Yet Openreach is considered the object of its desires as it is seen as vastly undervalued. BT’s market capitalization is £14.75 billion.

But Openreach is estimated to be worth £23 billion as a separate entity, even on a conservative basis, with some citing as much as £40 billion, as full fiber is a superior technology, cheaper to maintain than copper.

Analysts have set an average price target of 192 pence, suggesting BT could deliver. The 5 percent dividend yield is a compelling argument to buy more shares, especially since transformation could significantly increase this yield.

Few, I think, will go online, relying on the services of Openreach, to see who could play Drahi or Jansen in a drama based on the goings-on at BT Group. But small shareholders will hope they can be a star combination.