‘Together has no limits” is an offence to the English language, but Patrick Drahi’s corporate slogan might be pertinent when it comes to BT. The French-Israeli tycoon popped up on its share register in June with a 12.1 per cent stake. At the time, Drahi said he did not intend to make a takeover offer — a promise that bound his hands for six months.
Yet few expect the stakebuilding to be the limit of his ambitions; Drahi is likely to come back for more after his bid moratorium expires in December. In the meantime, his presence has stirred up private equity interest in BT and its Openreach broadband subsidiary. One of the most important infrastructure assets in Britain is very nearly in play — and Drahi, billionaire founder of the European-focused telecoms group Altice, looks set to take a key role.
The London market is in the grip of an M&A boom. Buyout firms have struck 13 public-to-private deals so far this year with a total value of almost $31 billion (£22 billion), according to data firm Dealogic — the highest number since 2007. Many of the companies being bought — supermarket chain Morrisons, the property developer St Modwen — are the kinds of stocks the market has come to undervalue. They have solid asset backing and cashflows, but they are in mature industries and might have unexciting growth prospects or a need for long-term investment.
BT fits squarely into this category. Having shaken off the sins of the past, when it made costly and distracting investments in sport and fell foul of an accounting scandal in Italy, it is planning to spend £15 billion rolling out the fastest “full fibre” broadband to 25 million premises by 2026. A positive ruling by regulator Ofcom in March on the returns that Openreach and others would be able to make from full fibre unleashed a wave of energy in the sector. A pledge by Virgin Media O2 to upgrade more than 14 million properties over the next seven years hit BT’s share price last week and highlighted the hotter competition.
The 20-year Openreach project is the kind of investment that might appeal to less racy “core” buyout funds run by the likes of Blackstone and KKR. It obviously appeals to Drahi, who has extensive experience of building fibre in Europe and views BT as the likeliest winner in Britain’s ultrafast internet market.
Advertisement
The biggest obstacle to a takeover in the past was BT’s deficit-laden pension fund, which made the company look like a retirement scheme with a telecoms group attached. The results of a triennial review in May put the pension problem into a more favourable perspective, with the deficit shrinking from £11.3 billion in 2017 to £8 billion last year. BT and the trustees agreed a repair plan including £2 billion secured against the shares of EE, BT’s mobile phone business.
So the clouds have largely cleared since Philip Jansen became chief executive in February 2019. Yet despite a rally since last autumn, the battered shares are trading at 174.7p, down a quarter since Jansen joined. BT is vulnerable to a takeover and may become more so when chairman Jan du Plessis leaves in October or November.
Drahi, 57, is understood to have made it clear in conversations with industry figures that he wants to play a big role in BT’s future. His presence has also stoked pre-existing interest in BT from a wide range of private equity firms. Altice’s stakebuilding is highly likely to catalyse corporate activity in the next year or so.
Business secretary Kwasi Kwarteng likes to say he is “monitoring” contentious situations involving the likes of Glaxo Smith Kline — usually code for doing nothing. In most cases, he is right to sit on his hands. But in the event of a BT takeover, the government would be expected to take a careful look. BT is to all intents and purposes already foreign-owned — after Drahi, the biggest investor is Deutsche Telekom, whose 12 per cent stake is a legacy of BT’s EE purchase. (Many of its other 795,000 shareholders are retail due to its 1984 privatisation.)
The Germans take a different view on the national importance of telecoms infrastructure: the state owns 31.9 per cent of Deutsche Telekom.
Advertisement
Covid has shown why we need strong connectivity. BT’s share price has rarely been at such low levels. The value of its assets and services has rarely been so high. The coming year could bring challenges for the board, and ministers.
More heat than light over Vectura
One situation Kwarteng should go no further than “monitoring” is the £927 million purchase of Vectura by Philip Morris International (PMI). Vectura, based in Wiltshire, produces inhalers to treat respiratory conditions often exacerbated by smoking. PMI shipped 628.5 billion cigarettes last year. It’s not hard to see why the mooted deal has sparked outrage; it’s a bit like a weapons maker going into hospitals.
You might not like the deal, and you might think PMI’s mission to be a “healthcare and wellness” company is risible, but the government has no place deciding whether or not an acquisition should go ahead on ethical or social grounds. And campaign groups and charities are entitled to their views, but this is ultimately a decision for the boards and shareholders. If PMI thinks it can own Vectura without destroying value through the huge backlash, and Vectura thinks the 150p-a-share offer is in the best interests of investors, they should go ahead. There is still a chance that buyout firm Carlyle, which had previously tabled 136p a share, could come back with a higher offer.
You could see this as a far more serious version of McDonald’s link-up with Innocent Smoothies in 2007. McDonald’s was pilloried for its cynicism, Innocent for selling its soul, and the trial to sell the fruit drinks with burgers was ditched five years later. But the two sides were free to try. In a free market, freedom and responsibility are two things not to be stubbed out lightly.
oliver.shah@sunday-times.co.uk