BT Fine: Equity Analysts View

BT announced on March 26 that it has agreed to a settlement with Ofcom, the U.K. telecom regulator, regarding its use of deemed consent

Allan C. Nichols, CFA 28 March, 2017 | 8:59AM
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BT (BT.A) announced on March 26 that it has agreed to a settlement with Ofcom, the U.K. telecom regulator, regarding its use of deemed consent. Deemed consent allows for halting or rescheduling the delivery of Ethernet services based on a number of circumstances beyond its control.

Apparently, BT used this excuse inappropriately to slow down services its competitors needed. Ofcom imposed a fine of £2 million for the seriousness of the violations. This is one of the largest fines Ofcom has ever given. Ofcom also fined BT £300,000 for failing to provide accurate and complete information under the Communications Act 2003.

Finally, BT agreed to compensate affected communications providers outside of BT, which is estimated to cost about £300 million. These charges basically offset the time value of money that has accrued since our last update, so we won't change our fair value estimate or narrow moat rating. However, they are another black eye on the reputation of BT and management, primarily CEO Gavin Patterson.

BT's Openreach division has implemented a number of changes recently, including establishing an independent board of directors and changes to its training on the proper use of deemed consent. We expect this will help prevent further abuses. However, we are disappointed that most of these changes only occurred due to pressure from Ofcom. We are concerned regarding other potential unknown managerial problems.

Investment Thesis

With the closing of its acquisition of EE, BT becomes the only truly convergent telecom operator in the United Kingdom with the ability to offer fixed-line and wireless telephony, broadband, and pay TV on its own network. The U.K. has trailed several other European countries in moving to converged services, but we think this acquisition will help jump-start that move. BT should benefit, as it controls the whole network, while others will need to wholesale at least some services from someone else.

We are not as enthusiastic regarding BT's other venture of taking on Sky in television by launching its own sports channels. The firm has spent or has contract commitments to spend about £2 billion on content and launch costs. While the business won the exclusive rights to the UEFA Champions League and UEFA Europa League and now has more than 3 million direct customers – 5 million including wholesale, Sky continues to add broadband customers. We are pleased that the firm is beginning to charge its lower-tier broadband customers for access to its sports channels. We think BT needs to charge in order to have any hope of earning a decent return on the capital it has invested.

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About Author

Allan C. Nichols, CFA  is a senior stock analyst and international investing specialist with Morningstar.