Breakingviews - BT would be high-risk private equity double play
LONDON (Reuters Breakingviews) - Does anybody really want to buy BT? Despite nearly four decades as a private company, Britain’s former state telecommunication monopoly has struggled to balance the demands of politicians and shareholders. With Prime Minister Boris Johnson targeting rapid broadband rollout as a solution to British inequality, the tension is particularly acute. But that may provide a new owner with a possible edge to add to BT’s juicy breakup potential.
Speculation has swirled around the 10.5 billion pound ($14 billion) company ever since Chief Executive Philip Jansen axed its dividend this year to help pay for broadband investment. The plan is to spend 12 billion pounds hooking up 20 million British homes to full-fibre networks. That, plus a pension black hole that analysts estimate at 9.8 billion pounds, has caused understandable angst among investors. BT shares slid below a symbolic price of 1 pound this month, their lowest in more than a decade.
Even after Monday’s 7% gains, sparked by a Sky News report that Jansen asked Goldman Sachs to bolster his takeover defences, BT’s enterprise value is around 29 billion pounds, or just 3.5 times next year’s forecast EBITDA. That’s only slightly more than Openreach alone, if you put the 2.9 billion pounds of EBITDA that the broadband unit is likely to make on the 9 times multiple of Liberty Global-owned rival Virgin Media. Throw in BT’s other units, like its EE mobile phone outfit, and its enterprise value could be as much as 50 billion pounds. After deducting 18.3 billion pounds of net debt, BT’s equity would be worth around three times its current value.
That alone should be enough for buyout funds sitting on record amounts of dry powder, and with access to ultra-low credit, to pull out the slide rule. There would be inevitable public and political opposition, especially with the economy reeling from the coronavirus. But a potential buyer – the Financial Times reported in May that infrastructure fund Macquarie was interested - could argue that it would be better placed to finance Openreach’s broadband needs away from the scrutiny of public markets, especially if sovereign wealth funds also joined in. In return, the buyers get the infrastructure that will be throwing off cash for decades. That sounds like something for both sides to talk about.
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