The venerable telecoms company will need to get aggressive to survive, says Phil Oakley.
BT is a telecommunications (telecoms) company made up of four main businesses. BT Retail sells telephone, broadband internet and pay-TV services to households, and it also sells phone, data and broadband services to businesses.
BT Wholesale provides telephone, broadband and data services to other telecom providers, who then sell them on to their own customers. BT Global Services manages network IT services for large companies and public-sector customers worldwide.
Finally, Openreach owns and operates the ‘local loop’ network – the connections between local telephone exchanges, and people’s homes or business premises. Openreach is responsible for the roll-out of BT’s fibre-optic broadband network.
Though owned by BT, the business is regulated and must sell access to the local loop to all telecoms companies, not just BT. BT had sales of £18.9bn in 2012.
BT is generally believed to be the oldest telecoms company in the world and can trace its history back to the 1840s. Its more recent past was associated with Britain’s General Post Office, which ran the UK telephone network for most of the 20th century.
In 1980, British Telecom was created. It was privatised by the UK government in 1984. As the UK market opened up to competition, BT started to expand overseas. It tried to merge with US company MCI to create a global telecoms giant in 1996, but was trumped by a higher bid from rival Worldcom. BT also joined forces with Securicor to create a mobile telecoms business called Cellnet.
The late 1990s saw BT embrace the internet boom. It took on large amounts of debt buying up other companies and mobile network licences. When the boom turned to bust, BT could not cope with the £28bn of debt it had taken on. It sold its Yellow Pages business for £2.1bn and asked its shareholders for £5.9bn of fresh money, before spinning off its mobile business.
The company then embarked on cleaning itself up. Costs were cut and the business made more efficient as the UK telecoms market became fiercely competitive. It also had to deal with big shortfalls in its pension fund.
In the late 2000s, BT successfully built up a large broadband internet business and entered the pay-TV market. During the last two years it has been building a £2.5bn fibre-optic broadband network to offer new services. It has also made a big move into pay-TV by spending lots of money buying up expensive broadcasting rights for sporting events.
The chief executive
Ian Livingstone has been running BT since 2008. He is one of life’s high-flyers, having risen rapidly up the corporate ladder. After qualifying as an accountant he became the youngest finance director in the FTSE 100 when he was given the job at Dixons in 1996 aged 32.
He took the same job at BT in 2005 before taking over the group’s retail business. After growing BT’s profits in recent years, he has to prove that he can start growing its sales again.
Should you buy the shares?
BT has it all to prove. Its cost-cutting strategy has delivered a solid run of quarterly profit growth, but without growing revenues, BT cannot grow profits in the long-run. So it is pursuing a bold strategy to take on the might of BSkyB in the pay-TV market. The likes of Setanta and ITV have tried to do this in the past and failed miserably – but BT has almost no choice but to do so.
More and more households want to buy their phone, broadband and TV from the same provider. Without a credible TV offering, BT’s broadband customers might defect to rivals such as Sky, Virgin or TalkTalk.
Up until now, BT Vision – BT’s pay-TV service – has been a bit of a damp squib. It only has 750,000 subscribers compared to the 10 million-plus of Sky. So BT has started spending lots of money – nearly £1bn – buying live sporting rights. It has also been signing deals to broadcast other live (known as linear) channels such as National Geographic and Eurosport.
Unlike Setanta, it has managed to get its hands on some decent football matches that people will probably want to watch. But to make this work, BT must distribute them efficiently. This is where BT’s £2.5bn investment in fibre-optic broadband comes in. BT aims to be able to provide this to two-thirds of UK households by spring 2014. This will allow high-definition TV to be broadcast live over the internet, without clogging up the network.
But can it succeed? It looks like BT will have to win a few million customers away from Virgin and Sky to do so. This will probably require some aggressive pricing to tempt people away. Whether enough customers will want to move, or have the necessary access to superfast broadband to jump ship, remains to be seen. BT could pull it off, but the shares have become more risky as an investment, having gone up by nearly a quarter during the last year.
The pension fund deficit of £3.1bn is an added complication, albeit one that BT is dealing with. The shares are not expensive and offer some decent dividend growth, but we are not buyers at this level. They are a solid hold though.
Stockmarket code: BT.A
Share price: 244p
Market cap: £19.2bn
Net assets (Sept 2012): £577m
Net debt (Sept 2012): £9.4bn
P/e (current year estimate): 9.8 times
Yield (prospective): 3.8%
Interest cover: 4.4 times
What the analysts say
Average price target: 247p
I Livingstone (CEO): 2,491,453
A Chanmugam (FD): 543,318
M Rake (chairman): 117,153