BT shares are among the day’s biggest fallers after two downgrades from analysts and a government comment suggested a break-up of the business was still possible.
Regulator Ofcom said in July it would not recommend that BT should sell its Openreach division, which owns the fibre and copper wires which run from local exchanges to homes and businesses, but that it should be run as a legally separate company.
But at a broadband conference, minister for digital policy Matt Hancock was asked if BT should be split up to help improve the country’s broadband connections. As reported by Reuters he said “nothing is off the table” and added that no one would get in the way of getting fast fibre-based connectivity.
Meanwhile Deutsche Bank issued a sell note on the business and cut its target price by 25p to 345p. It said:
BT shares have under-performed year to date and are arguably no longer expensive versus peers. However we view the risk of deteriorating operational newsflow as high, especially in the second half as Virgin Media’s network expansion programme gains momentum, Sky enters the mobile arena, and Vodafone makes deeper in-roads into consumer fixed. Throw in Brexit, macro-economic trends, pension risk and higher capex risk (BT spends less than peers) and we prefer to see BT at a deeper discount to its European peers, which are on balance seeing improving rather than deteriorating operating trends.
UBS reduced its target price with a neutral rating, and also pointed to the pension deficit as a concern:
Our underlying estimates are broadly unchanged and in-line with consensus estimates. Our price target is trimmed from 425p to 400p, with a 34p cut driven by a widening pension deficit offset by marginal upgrades elsewhere.
On regulation, Ofcom has already stated it is not inclined to structurally separate Openreach and will allow BT to decide the financial envelope of the unit going forward. Nevertheless, Ofcom stated structural separation remains an option if there is no resolution on legal separation/corporate governance of Openreach. Separately, the pension deficit for BT is large and growing. On competition, our main concern is rising competition from the Project Lightning footprint rollout by Virgin Media as well as the risk of an EBITDA step down should Liberty Global and Vodafone undertake a broader deal.
We estimate the BT pension deficit on an actuarial basis now stands at £14.2bn (versus the £10.0bn disclosed by the Trustees as at June 2015). While a widening of the deficit may seem counterintuitive given the recent rise in gilt yields, yields are still notably lower than June 2015 and inflation assumptions have moved higher recently too. In terms of sensitivities, and at current levels, every 10bp increase on gilt yields is a £800-900m reduction on the liability and every 10bp increase in the inflation assumption is a near £700m increase in the liability. After netting off tax at 20% (the tax rate falls to 17% post 2020), the net deficit value in our sum of the parts for BT rises to £11.4bn versus £8.0bn before and leads to a 34p reduction in our [target]. Our pension payment profile in our cash flow forecast is unchanged (-£255m in 2017 rising to -£700m per annum thereafter) and the next review by the Trustees is due by March 2018.
BT is currently 4.6p or 1.2% lower at 380.05p.
