BT Group: break chance

Divorce rates in the UK have fallen by over a third since the mid-1990s. The population is ageing and older couples rarely split. BT Group is one such Darby and Joan pairing, with a telephone company married to infrastructure business Openreach. Some shareholders wish the pair would break up . Their hopes are overdone.

A changing of the guard has inspired renewed lobbying for radical change. The share price of the company has trailed the FTSE by 75 percentage points over three years. A new chief executive will eventually replace incumbent Gavin Patterson. Yet, new chair Jan du Plessis claims he will avoid drastic changes simply to lift an ailing stock price.

The new chief will need to focus on something more pressing: BT’s dividend. This means lifting free cash flow, not just hiving off units. At the same time the company will have to decide how much to spend on a fibre network build out to homes. The shares already yield nearly 7 per cent, suggesting the dividend is at risk. Free cash flow barely covered the payout last year. The company promises a bigger buffer. But that is before a clear picture emerged for capital spending on the Openreach network.

Lex chart: BT Group

Given this uncertainty, BT’s underfunded dependants, its pension schemes, are entitled to feel nervous. The trustees would probably reject a split on the basis that BT and Openreach could find it harder to cover liabilities if they part. Over the past two years the pension deficit has more than halved to £4.6bn. But that does not mean it will disappear soon.

The burden of the pension scheme — and qualms about regulation — are reflected in a lowly rating. BT trades at a ratio of enterprise value to ebitda of around four times. A valuation that adds up the standalone worth of divisions, including consumer and business units comes to a figure around 15 per cent above the current share price.

It is naive to imagine BT can close this gap with a demerger or sale that regulators and trustees would resist. Some couples stay together by preference, others by necessity. BT and Openreach fall into both camps.


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