BT investors cheer Openreach split
Telecoms giant relents to regulatory pressure, laying foundations for a boost to UK broadband investment
BT HAS sealed a deal to legally separate its network unit, Openreach, from the rest of the company, laying the ground for a boost in investment in Britain’s broadband infrastructure that will deliver better reliability and faster connections.
After two years of fraught negotiations with the industry regulator Ofcom, BT has agreed to transfer 32,000 staff to a subsidiary with its own board and control of the network.
The agreement helps brings to an end an extended period of uncertainty for BT and its shareholders. The company’s stock closed up 3.7pc at 342½p as the City expressed relief that years of potential legal wrangling had been avoided. Analysts at Barclays said it was a “clear positive” for the company, which has also been battered this year by a profit warning and accounting scandal in Italy.
Openreach will now enter discussions with its biggest wholesale customers, which include Sky and TalkTalk as well as BT’s own retail unit. These operators will now push for new investment plans to include wider deployment of full fibre optic connections to replace ageing copper telephone lines.
BT already plans to lay 2m full fibre lines but Openreach’s new independent chairman Mike McTighe has said it should go further.
Gavin Patterson, BT’s chief executive, said the agreement would have no immediate impact on spending on broadband but marked progress towards greater investment and service improvements.
He said: “I do think it will give Openreach the chance to review exactly what it’s doing and talk to all its customers and consult on what is the right overall plan for the network. There will be more consultation around the way to invest, how to create good business cases around network investment.”
The deal on a new structure for the unit means Ofcom and the Government will avoid a potentially embarrassing trip to Brussels to seek EU approval to impose legal separation of Openreach against the backdrop of Brexit discussions.
Crucially for BT, Ofcom agreed that it can retain full ownership of the network assets, with Openreach able to control them via a contract known as an agency agreement. The company feared hundreds of millions of pound of extra costs if it had been forced to transfer the assets as well as the staff. It said the trustees of its £50bn pension scheme would have demanded bigger annual top-up payments if it did not retain ownership of the network. Credit rating agencies could also have downgraded BT, making its debts more expensive.
Mr Patterson said: “There was a lot of discussion around the assets. That was a red line for us because separation of the assets would undermine the covenant and create additional pension drag, which diverts money away from investment. I’m pleased to say Ofcom listened to the advice of pension experts and recognised that wasn’t in anybody’s interests.”
To allow staff to be transferred to Openreach, the Government is in talks to extend the Crown Guarantee that underwrites the BT Pension Scheme. It means that taxpayers are liable to plug the deficit in Britain’s biggest private sector retirement fund if BT hits financial trouble. Ensuring that security is retained by a legally separate Openreach will require new legislation, which Treasury officials have begun work towards drafting.
BT’s rivals, which have been calling for Openreach to be spun off entirely as an independent company, welcomed the deal. Sky and TalkTalk called for the new structure to be implemented as soon as possible, while Vodafone said Ofcom must enforce it to “ensure the UK gets the ultrafast fibre networks it will need to compete effectively”.
Tom Mockridge, chief executive of Virgin Media, which owns its own network, said: “Openreach is just the same old snail-paced network with a new shell. Call it what you like but it’s still BT, four times slower than Virgin Media.”
A spokesman for the regulator said that, depending on the legislation to extend the Crown Guarantee, it hoped Openreach would be legally independent by the end of the year.
Sharon White, Ofcom’s chief executive, said: “The new Openreach will be built to serve all its customers equally, working truly independently and taking investment decisions on behalf of the whole industry – not just BT.”
As part of the changes the BT brand will be dropped from Openreach. Mr McTighe has said he will consider a complete name change.
The telecoms industry is now looking to Ofcom to set out proposals for new wholesale price controls for the current generation of superfast broadband by the end of the month. BT currently has freedom to set the price. The details of the new regime will be crucial to Openreach’s investment plans.
‘The new Openreach will be built to serve all its customers equally, working truly independently’