CFDs are a leveraged product and can result in losses that exceed deposits. Please ensure you fully understand how CFDs work and what their risks are, and take care to manage your exposure. CFDs are a leveraged product and can result in losses that exceed deposits. Please ensure you fully understand how CFDs work and what their risks are, and take care to manage your exposure.

BT Group: the ‘complex and overweight’ telecoms giant

The outlook for BT is bleak; they have launched their biggest restructuring in a decade and warned that both revenue and profit will suffer for the next couple of years. The telecoms giant has a momentous challenge ahead and the BT share price has hit new lows, so what next?

Source: Bloomberg

BT Group is one of the UK’s most important companies. It is the sole guardian of the Openreach network of wires and cables that connect the country, is the biggest broadband provider, owns the UK’s largest mobile carrier EE, and is responsible for over 100,000 jobs. 

That is all the more prominent after Sharon White, the chief executive of regulator Ofcom, recently warned BT Group faced having a ‘Kodak moment’ if it failed to keep up, referring to the collapse of the once-immortal photographic giant that fell from grace. Relations between BT and Ofcom have deteriorated over recent years. Ofcom wants BT to roll-out faster broadband at a quicker pace by investing more money, and has been unhappy with how it handles its monopoly over the national network that BT charges its rivals to use. 

While BT is consistently criticised for being too slow and inefficient, it has spent billions outside of its core fibre business in recent years. It bought EE for £12.5 billion in 2016 and has spent the eye-watering sums required to nab the sport TV rights, most recently securing the Premier League rights for three more years at a cost of £295 million a season. At the same time, BT Group has a bulging pension deficit and is facing a £1 billion revenue hole over the next three years because of rising regulatory costs. 

The company has been criticised for its spending habits, with some arguing it has neglected its core business and ignored the pension problem while spending all of its money entering or expanding into new areas, like content and mobile. 

BT Group is adamant it has the right strategy and is making the right moves to evolve with the market, and has launched the biggest reorganisation in ten years to address the company’s woes. But confidence behind BT and its board is still deteriorating fast. Profit is not set to return to growth for the next couple of years, the dividend has stagnated and looks very vulnerable, thousands of further job cuts are being made and it has even given up its historic headquarters in central London to cut costs. Shareholders are starting to seriously question BT’s prospects and its ability to overcome the ever-growing list of challenges, and they are right to do so. 

BT Group 2018 earnings and outlook fail to impress investors

BT Group failed to impress when it released its annual results towards the end of March, reporting lower revenue, lower underlying earnings and a flat dividend. The results were mainly driven by the decline in its Enterprise division as it exited from some lower-margin businesses, some of which was absorbed by growth in its Consumer arm.

BT Group five-year performance

Most exits have been made in the Global Services unit that serves international businesses, which has been a burden for BT over recent years. BT is still paying for the accounting scandal that unravelled at BT Italia in 2016, and that further scarred the division after more severe accounting irregularities were found in the Global Services unit back in 2009. The 9% drop in revenue from Global Services at the end of 2017 was the main drag on BT’s overall performance, and meant the firm failed to deliver its guidance.

BT Group's 2018 results

But the outlook is what has shareholders concerned as it is going to take BT two to three years to return to growth, and the restructuring that needs to happen does not come cheap. In a nutshell, income is declining as spending is rising and this has investors concerned that payouts could be chopped should conditions worsen. The dividend was flat at 15.9p, and that is the maximum shareholders can expect next year too.

Order intake by division on 12-month rolling basis at March-end, 2018

  2017 2018 YoY % change
Business and Public Sector
£3.37 billion £3.39 billion 1%
Wholesale and Ventures
£1.96 billion £1.42 billion (28%)
Global Services
£4.60 billion £3.85 billion (17%)

Revenue, earnings and cashflow will all deteriorate this year, while capex will peak with £3.7 billion budgeted for both this year and next, with the increased spending being channelled into Openreach’s ‘Fibre First’ programme and building up both 4G and 5G mobile networks.

BT performance in 2018 vs guidance, and outlook for the 2019 financial year

  Guidance for 2018 Reported in 2018 Guidance for 2019
Change in underlying revenue
 Flat  Down 1% Down 2% 
Adjusted EBITDA
£7.5-£7.6 billion £7.5 billion £7.3-£7.4 billion
Normalised free cashflow
£2.7-£2.9 billion £3 billion £2.3-£2.5 billion


BT Group: restructuring the ‘complex and overweight’ giant

The telecoms giant has already been tinkering with the business and last year it delivered £180 million in annual savings, driven by 2800 jobs being cut. But that is just the start as BT is now embarking on a huge £800 million restructuring programme aimed at cutting costs across the business by £1.5 billion over the next three years. It will cut the amount of offices it has to 30 from the current 50, and cut another 13,000 jobs to free up cash to invest elsewhere. However, it is also hiring new staff as it brings back customer service operations from India and recruits more engineers, at least 3500, to help boost the roll-out of broadband and mobile networks.

The list of 18,000 suppliers is also being chopped as BT looks to address its bloated supply chain, moving from ‘buying to strategic sourcing’.

The troublesome Global Services arm is being slimmed down to focus on its more valuable customers, mainly the biggest international firms that it provides security, cloud-computing and networking services to. That should reduce the intensity of spending within the Global Services division as it currently receives the most funding comparable to the cashflow it generates.

BT Group divisions: spending vs. cash

From April this year the Global Services division moved to a new model based around managing accounts on a global scale rather than on regional basis, which will require more integration. The move should help BT compete more effectively, particularly in Europe, but there is still some that believe the unit should either by spun-off or merged with a larger rival.

Two years on from buying the UK’s most popular mobile carrier, BT is integrating EE further into the business by merging it with its Consumer arm and rebranding the new division as ‘BT Plus’. The integration is delivering run-rate cost savings of about £290 million, which is on top of the savings made through other restructuring efforts. BT plans to step up its game when it comes to data to improve its personalised marketing capabilities, but that will be harder following new laws like General Data Protection Regulation (GDPR).

Read more on the effect of GDPR and how big tech is responding.

Meanwhile, the Business and Public Sector unit is being merged with the Wholesale and Ventures division in October of this year to form the new Enterprise arm. BT plans to pursue new revenue streams from the likes of Voice over Internet Protocol (VoIP), networking and unified communications.

BT aims to bundle products together into packages

BT’s restructuring will make it better suited to take on its rivals like Sky, who focus on selling their customers multiple products, also referred to as convergence. The new BT Plus brand geared toward consumers will try to sell customers a package encompassing all the elements of BT – mobile, broadband and TV.

BT Group operational performance

While that will help consolidate its existing customers, enticing TV customers to join EE, or for EE customers to take out BT Sport, for example, the move will also help attract the substantial chunk of the market that doesn’t use BT or EE. Despite BT’s dominance, it still believes there are around 13 million homes in the UK that don’t use any of its services, providing plenty of growth for the telecoms giant to chase after.

Content and mobile will be ‘bedrock’ of business 

The money that has been spent acquiring EE and securing ever-more expensive sports rights for its TV offering has drawn criticism, but BT is convinced that the mobile and content will be at the heart of its strategy going forward – the ‘bedrock’ off the business.

In 2017, the company secured the rights of the UEFA Champions League and Europa League until 2021, and at the end of the most recent financial year, it built its offer by adding Premier League rights for a further three years from the 2019-2020 season. It also extended exclusive deals covering motorcycle’s premier class racing MotoGP and the Vanarama National League that encompasses the tiers of football immediately below the top four leagues.

The investment in sport content is having an effect. BT Sport’s average audience figures in the first three months of 2018 were 19% higher than a year earlier, the second best quarterly performance on record. That also excludes the viewers who watched events on BT Sport Showcase, whereby BT streams certain events on its YouTube channel.

In mobile, BT has continued to roll-out its 4G network while continuing to prepare to roll-out 5G within the next 18 months. 4G coverage had climbed to 90% by the end of March from 80% a year earlier, and should reach 95% by the end of December 2020.

As for 5G, EE secured 40MHz of the 3.4GHz spectrum auction that allows companies to bid for bandwidth. This was the same amount secured by O2, double the 20MHz bought by Three, but less than the 50MHz secured by Vodafone. However, as highlighted by Sacha Kavanagh of, the latest auction still leaves EE in the strongest position, despite not acquiring as much as some of its rivals, because it already had so much more spectrum that its competition. Before the latest auction, EE already held about 45% of the spectrum that could be immediately used. 

The 40MHz was less than half the maximum it could have secured, and comes at a cost of £304 million.

Openreach and Ofcom

Openreach, the network of cables and fibres that connect homes and business around the country, is the biggest earnings-driver for BT and one of the company’s main sources of both revenue and cashflow. However, the monopoly that BT has by owning Openreach means the division comes with a lot of responsibility, high expectations and a lot of monitoring and scrutiny from regulator Ofcom. 

BT agreed to separate Openreach last year to make it more independent after several years of pressure from Ofcom, who were unhappy with how BT handled giving access to its rivals. Other providers like TalkTalk, Vodafone and Sky have to pay BT to gain access to Openreach so they can provide their own services to end users – much like energy supply companies have to pay National Grid to access the main electricity network. But the conditions of the separation were much better than expected and BT, and BT shareholders, still ultimately own the nationwide network.

The threat from Ofcom has waned, but BT needs to convince regulators it can do its job as the national operator and that it is fit for business. ‘Should it become clear the new Openreach was not working, or BT was failing to comply with its commitments, Ofcom would revisit the model and consider new measures to address any concerns,’ the regulator stated last year.

That means BT is having to play a very delicate balancing act. While BT aims to deliver fibre ‘economically, at scale and pace’, it will undoubtedly be slower than Ofcom will want and the firm will have to satisfy the regulator while keeping an eye on its balance sheet. The 3500 new engineers will represent the ‘largest recruitment drive’ in Openreach’s history (but a drop in the water compared to the cuts), according to BT, and will first focus on eight major cities including London, Birmingham and Manchester.

Openreach plans to connect three million premises to its full fibre service by 2020. That would be double the current 1.5 million connected after it soared from just 200,000 at the end of March 2017, and forms part of its wider target to hit ten million by 2025.

The amount BT charges its rivals to access its fibre product is being controlled for the first time under new laws introduced this year, which will knock £80 million to £120 million of revenue in the current financial year, with more charges expected from pressure on wholesale prices and higher costs after the regulator raised its minimum service requirements. Quite simply, Ofcom thinks Openreach is still making too much money from its monopoly, and therefore holding back development in the country’s broadband network.

The price controls are the main reason why overall revenue and adjusted earnings are expected to fall this year. BT says it ‘remains important for us to secure a fair return on investment’ from Openreach, but has tried to put a positive spin on the new policies by focusing on the clarity it provides compared to the uncertainty it was facing beforehand.

While the growth in 4G coverage will slow as it enters more remote parts of the country, BT has also developed new products to help rural areas by switching to mobile data. A new box boosts signals in rural homes that struggle to get one and allows those that don’t have an internet connection (or a very poor one) to gain a better service using mobile data, which in turn will play a part in its convergence strategy by offering a new avenue to push EE. Costs of connecting rural homes to a line connection is also vastly more expensive, so this provides BT with a cheaper and potentially better alternative for both customer and company.

BT Group manages to put pension problem on hold

The other elephant in the room is BT’s pension deficit, which has ballooned to £11.3 billion from only £7.4 billion in 2014. BT has struck a deal to pay £2.1 billion over the three years to March 2020 (with £850 million paid in March 2018 and £1.25 billion due by the end of June) with annual payments of just over £900 million being made for the following decade. There is also a £2 billion contribution in the form of bonds, which has gone some way to helping BT avoid cutting its dividend so far.

BT argues the deal removes a major uncertainty for the business, much like it focuses on the clarity it received from Ofcom on its wholesale pricing. But the deal has not addressed the underlying problem, rather it has simply given it breathing space for the next three years. BT said the deal ‘reduces exposure to the pension risk’ – it doesn’t solve it.

BT share price: a tech analysis

BT shares are an indication that it is indeed possible to see rampant downtrends even in strong bull markets. Since the ‘death cross’ of 13 April 2016, the shares have more than halved, and each sustained rally since then has run into a wall of resistance, as lower high is followed by lower high. The latest in April saw the shares nearly hit 200p, the lowest since 2012. A rally that fails to move above 235p will be another prime selling opportunity, and a move above 250p is needed to create a new higher high. The May-June 2012 low of 197.4p is the next target, and 157p below this.

When does BT Group report next?

BT Group will release results for the first quarter of its new financial year on July 27, covering the three months to the end of June.

BT Group has a momentous challenge ahead

BT has been forced to restructure itself after investing heavily to enter new businesses before it was told to invest substantially more in its broadband network by regulators, leaving it juggling too many plates with too few hands.

This has led to its investment being questioned and spending priorities being criticised, and that opinion will grow now that BT has warned it will take years to return to growth. However, many will argue its investment in the likes of content and mobile is the right thing to do when the next era of the business is clearly based around the imminent widespread roll-out of 5G mobile networks, as well as faster, full-fibre broadband.

BT Group has many advantages over its competitors but the need to prove it deserves those advantages is growing. The separation of Openreach will go some way to allaying Ofcom’s fears but the growing crossover between regulation and politics means the spotlight will remain firmly fixed on BT and its integral role in the country’s communication infrastructure. The collapse of support services firm Carillion has demonstrated the consequences when firms responsible for integral parts of the country’s infrastructure collapse, and heaped pressure on those still providing those crucial services.

Chief Executive Gavin Patterson has been at the helm since 2013 and was also part of the management team when the crisis at the Global Services division unfolded in 2009. Swathes of jobs cuts, the Italian accounting crisis, huge pension deficit, the sums spent on EE and content and the loss of its historic HQ are just some of the more recent events to happen under his tenure – and now he has to prove these controversial moves were the correct decision over the coming years. But restructuring such a ‘complex and overweight’ giant, as described by Patterson, is no small feat. Many expected Patterson to leave after Jan du Plessis left Rio Tinto last year to take up the role as chairman of BT, but he is supporting the CEO and is backing his strategy.

BT has had a tough time winning round regulators over recent years and needs to try to get back on side, shareholder confidence has now experienced a huge knock and customer’s expectations have never been higher. Maintaining the dividend will be key to keeping investors sweet while it overhauls the business over the coming years, but with little leeway when it comes to its rising budgets, any problems concerning cash is ever-more likely to weigh on shareholder payouts.

The next couple of years will be hard for BT; the firm may be down, but it does not lack the resources needed to turn things around and to reconnect with investors.

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