There is plenty to worry about at BT, even without the government’s announcement yesterday that everyone in the UK should have a legal right to fast-ish broadband from 2020. The group’s enormous underfunded pension promises, its huge foray into sports broadcasting and its handling of a costly accounting scandal in Italy have all seriously unsettled investors.
The promise of a legally binding universal service obligation (USO) by the culture secretary, Karen Bradley, is an extra concern. Without details on how the cost is divvied up between BT, other providers and taxpayers, it’s very hard to gauge the impact on the company. Even its rejected voluntary proposal would have cost it £450-600 million.
The USO will probably cost it more and expose it to more robust competition, not to mention the threat of a challenge in the courts. It also sends a signal that ministers are prepared to get tougher on BT, which for years has been seen as more interested in playing regulatory brinkmanship than improving broadband availability. Given all this, yesterday’s modest 1.3 per cent slide in the share price was a pretty stoical response.
There are a lot of other moving parts for investors trying to get to grips with BT. Uncertainty number one is the pension scheme. In the first half of next year it has to agree a new triennial review with its pension trustees, who want reassurance that the £11 billion-odd shortfall in the scheme will be reduced as quickly as possible without damaging the company.
BT may be required to make replenishment payments of as much as £1.1 billion into the scheme. One wheeze — pledging BT assets to the scheme — could reduce the pressure for immediate cash.
Uncertainty number two is over sports rights, in particular the auction, probably in February, of Premier League football broadcasting rights in the three seasons from 2019. The danger is either that BT misses out, which could dent broadband subscriptions, or that it overpays. At present it forks out £320 million a season. Sky has been the main competitor but there is talk of the deep-pocketed Amazon and Facebook muscling in.
Uncertainty number three is the question of who is to pay for the new generation of super-fast broadband achieved by running fibre all the way to people’s homes and business premises. BT’s arm’s-length division Openreach is expected to invest £4 billion or so over eight years rolling out so-called fibre-to-the-home, or FTTH, to 10 million homes. But how much will it be allowed by Ofcom to charge third-party service providers such as Sky and Virgin? UBS estimates that, at best, Openreach should be able to make a 12.5 per cent per annum return on its investment, but at its worst that would fall to just 4.5 per cent.
Uncertainty number four is the management. The shares have dived from a high of 500p per share to just 270¼p over the past two and a bit years. Any further setbacks and Gavin Patterson, the chief executive, is probably toast. A new chief may well take the opportunity to cut the dividend and perhaps rethink the entire sports strategy.
Some analysts believe the dividend is unsustainable anyway. Saeed Baradar, at Louis Capital Markets, who has been bearish (and rightly so) on BT for more than a year, says the sports content strategy is “in tatters” and the market is underestimating yesterday’s rural broadband decision. He reckons the 15.4p payout will be cut next year.
On the other hand, the dividend is almost twice covered and Mr Patterson will fight tooth and nail to preserve it, as he wouldn’t survive a day longer if it were to be reduced.
Advice Hold
Why Legitimate worries about the group and the dividend, but these are fully reflected in the languishing share price
Booker
The competition regulator’s final approval for Tesco’s takeover of Booker leaves Britain’s biggest grocery retailer to focus on shoring up enough investor support to complete the merger.
Although a couple of big Tesco investors, including Schroders, oppose the takeover, a survey by Bernstein, the research group, indicates that Tesco shareholders will approve the deal comfortably above the 50 per cent threshold.
The response from Booker shareholders, where the threshold is 75 per cent, could be less straightforward. Aviva, for one, has quietly sold its stake in Booker.
There were murmurings last month that, with Tesco’s share price below the level of when the bid was made, Booker shareholders may push for a higher price.
These are smaller shareholders who won’t have enough votes, according to Bernstein, and Tesco’s shares ticked back up yesterday to about the same level that they rallied to in the immediate wake of the takeover announcement in January.
Under the terms of the offer, Booker’s shareholders will receive 0.861 new Tesco shares and 42.6p in cash, as well as any dividends due before the deal closes. It values Booker at about 220p a share, or 22 times earnings, pre-synergies, a premium to the multiple across the UK market, according to AJ Bell, the broker. Booker shareholders will be left with about a 16 per cent stake in the combined group.
Analysts have generally applauded the deal. Management expect to deliver synergies of £200 million a year but HSBC suggests a figure closer to £500 million, half of which could be invested to drive sales growth. Booker shareholders join a group that has a 28.2 per cent share of Britain’s grocery retail market and allows Tesco to tap the faster-growing “out of home” food market where Booker distributes to the catering industry. Clients range from Wagamama and Byron to thousands of independent caterers.
Booker shareholders nervous of the deal can take reassurance from the highly regarded Charles Wilson, Booker’s chief executive, who exchanges his 6 per cent Booker holding for Tesco shares, locking them up for five years.
Advice Hold
Why Transformative merger led by quality chief executives
