BT Plc and Takeover Bid from Deutsche Telecom Amidst A Decade Low Showing at the LSE

Summary

• German telecom firm Deutsche Telekom currently owns 12 per cent stake in BT and given the sharp fall in prices of BT's shares on LSE because of the pandemic; speculations are rife that the German firm could make a bid.
• The company is currently working on various strategies to protect itself against such hostile actions, including breaking up the company which would unlock value and improve the share performance of the company.
• The company’s current vulnerability to hostile bids also reflects upon the slack legislative structure in the United Kingdom, which needs to be updated urgently.

The shares of British telecom over the past few days have been in limelight. The reason is not a big contract that might have come its way or an overly impressive financial performance, but mere speculation that there is a hostile bid in the making for the company from Deutsche Telekom. The shares of the company which have been beaten down very badly since the lockdown, are now trading at extremely low valuations making it a target of several rival companies as well PE firms. One of the primary reasons why the company is so attractive for a takeover is that the valuations of some of its business segments are much higher than its current market capitalisation. Anyone acquiring this company may break it into separate legal entities and derive significant profits. The company management, however, has stated that it is not entertaining any such offers and is taking appropriate measures to protect itself from any current or future overtures.

What are the current problems with BT?

The problems of BT are largely legacy derived. The company currently pays out pensions a sum amounting to £800 million to nearly 280,000 people which is the largest in the country. Other than that, the current hit on its revenues because of the pandemic has also forced the company to cut down its dividends this year which is also a first in its history, it has also put a suspension on dividend till 2022.

The company currently is working on two major capital expenditure programmes; the first one is the building of the Fibre- to- the- Premises (FTTP) network which has a target completion timeline of end 2020 and the second is the 5G rollout plan which is still in the pipeline. In July amidst the row over Huawei supplied equipment being phased out from the United Kingdom, the company had announced that it would be facing a £500 million hit because of the government decision. This means that the company has an exposure to Huawei equipment and additional investment of at least £500 million will go into its 5G project than what was previously planned.

Thus, in addition to its pension commitments, both of the above development is also putting a strain on its resources and is having an ensuing impact on its performance.

Will breaking up the company improve its fortunes?

There have been suggestions that breaking up of the company would unlock significant value which could immediately improve its fortunes. Openreach, which is a division of BT and manages physical infrastructure assets and provides its services across many telecom companies in the UK, including some of BT’s competitors, has grown significantly in the recent past. This division if separated from BT, could operate independently and expand its operations while its financial burden would not be shared by BT. Currently, the valuation of this division is higher than the valuation of BT itself but is not reflected in BT’s valuations as it continues to operate as one of BT's functional division.

Breaking up this division can also help BT raise additional capital by putting a portion of its shares in the market for sale. The funds raised will not only help in the expansion of Openreach but also help BT resolve some of its financial problems. However, the company faces other structural issues as well, which also needs to address before its financial and operational position improves enough.

What changes need to be made to the British regulatory structure?

The current hostile takeover threat to the company also emanated from the slack laws in the United Kingdom, which are not adequate to protect its companies. The country which will now formally be out of the EU regulatory structure by 31 December 2020, will have to enact its own legislation at the earliest. The EU regulatory structure, which places all companies operating with the economic zone in the same pedestal, makes merger and acquisition deal easy among them so as to promote greater efficiency and value. Now that the UK is not part of the block, it cannot allow its businesses to be as easily acquired by a foreign company as it could lead to significant value migration out of the country. Any such deals which involves strategic infrastructure in the country must require prior government approval before it goes through.

How has the company been performing on the London Stock Exchange since the start of the year?

The shares of BT Plc saw a dip on the London Stock Exchange in the month of March when the lockdown was announced. While at the beginning of the year on 2 January 2020 it was trading at GBX 196.06 per share on, it traced a low on GBX 107.31 on 12 March 2020.

(Source -Thomson Reuters)

After the speculations regarding the possible takeover bid became rife, the shares of the company have rallied on the exchange. On 21 August 2020, the shares of the company were at GBX 101.80 and rose 7.92 per cent to GBX 109.00 on 24 August 2020, however, since then they have now come down, and on 28 August 2020 at 11.35 am they are trading at GBX 106.30.

To sum up, the current capital investment projects being undertaken by BT are likely to lead to massive value creation in the company, which will be in addition to the valuation of Outreach. All potential bidders, as well as the company's management, realises that. The company at this time should do all that it can to ward off these takeover threats and concentrate on the work it is doing. In future, it may itself divide its functional elements into separate legal entities leading to significant value creation for not only its investors but also for the entire country.