Friday 15 May 2020 9:07 am

BT shares surge on possible sale of £20bn stake in Openreach

BT’s share price jumped in early trading today following reports the telco is preparing to sell a £20bn stake in its fibre rollout arm Openreach.

The telecom giant’s shares, which have been trading at a record low this year, rocketed 9.25 per cent to 111.6p on a Financial Times report that discussions were underway.

BT has come under pressure to sell off Openreach, which runs the UK’s broadband network and is a legally separate entity to BT, in recent years.

Read more: BT scraps dividend as Covid-19 and full-fibre rollout hit profit

It has been a target for private equity investors for years and the FT now reports that Australian bank Macquarie and an unnamed sovereign wealth fund are interested.

But Reuters has reported Macquarie has not expressed interest and is not holding any talks with BT.

Reports of a possible sale of a large stake in Openreach come after BT ditched its dividend last week. The telco has also vowed to invest around £12bn to upgrade the UK’s broadband network.

Openreach’s income stems from millions of broadband customers across Europe and make it a valuable asset for BT.

Read more: How the O2-Virgin Media merger will reshape the telecoms sector

But selling a £20bn stake in Openreach – the number reported by the FT – could close BT’s gaping pension deficit and pay for the massive expense of rolling out full fibre broadband to 20m premises over the next 10 years.

It could also provide relief to BT’s rock bottom share price at a time when it is cutting costs that could affect thousands of workers.

BT’s stock slumped close to 100p after it cancelled its dividend last week to save £3.3bn. That means an Openreach stake sale could be worth double the company’s £10bn market capitalisation.

The giant also faces tougher competition from a tie-up between O2 and Virgin Media, which will compete with its own EE multi-play offering.

Read more: BT offloads £80m legal software arm Tikit as sell-off continues

CEO Philip Jansen has said regulator Ofcom will make the right conditions to invest in UK fibre rollout.

“Clearly in this environment the political and regulatory will to encourage investment is very, very high,” he said last week.

Jansen bought up £2m worth of shares in his company on Wednesday at £1 each. There is no suggestion he knew of the potential Openreach sale at the time.

BT Openreach stake sale may not solve all its problems

Jefferies analysts said the FT’s £20bn figure laid down “a highly relevant marker” for the start of any Openreach stake discussions.

But they said they doubted active talks were ongoing given Jansen’s £2m stock purchase.

“We wonder how that transaction could have been authorised if BT were at the same time engaged in non-public negotiations of such a material nature, even at an early stage,” they said.

Read more: UK companies could be holding up to £105bn in unsustainable debt, warns industry body

And Jefferies raised the prospect that BT’s pension trustees may oppose a sale even if they receive a third of the proceeds.

“The Trustee might still take the view that BT owning less than 100 per cent of Openreach becomes a weaker sponsor of the [pension] scheme,” analysts said.

“It might then seek to protect the scheme by applying a lower discount rate at the upcoming triennial review (30 Jun 2020). In this situation, BT might put material Openreach stake proceeds into the [pension scheme] but end up not reducing the funding deficit.”