Rival’s Sky deal stalls BT progress
A smaller rival is creating waves in the broadband infrastructure market, meaning BT shares have given up some of their recent momentum. Graeme Evans reports.
21st August 2024 13:15
by Graeme Evans from interactive investor
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Pressure on BT Group (LSE:BT.A) shares continued into a second session today as City experts calculated the Openreach impact of Sky’s landmark broadband deal with alt-net provider CityFibre.
The competition fears triggered by the new partnership wiped £900 million from BT’s value at yesterday’s close, erasing most of the gains seen since Bharti Communications last week disclosed it had bought the 24.5% BT stake previously held by Altice UK.
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BT shares this afternoon traded 1.65p lower at 134.65p, a level that attracted the interest of interactive investor customers as one of our most-traded stocks for a second day in a row.
The shares were near 100p in late April but subsequently rallied on the back of new chief executive Allison Kirkby’s boost to free cash flow guidance.
Sky is the largest customer of BT’s regulated Openreach division, spending a reported £950 million a year in order to supply its six million internet customers with fibre broadband.
Yesterday Sky disclosed a long-term partnership that will also see it launch broadband services on the CityFibre network. The alt-net supplier has a footprint of 3.8 million and is committed to expand its network to at least eight million premises over the coming years.
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It hailed the Sky partnership as “a huge vote of confidence” and one that cemented CityFibre’s position as the UK’s third digital infrastructure platform.
BT’s annual report in June revealed that Openreach had so far passed more than 13.8 million homes and businesses as it looks to meet a target of 25 million by the end of 2026. It has 30 million in its sights by the end of the decade.
A note published today by UBS estimates that the Sky deal will have an Openreach impact of about £120 million a year in terms of high margin wholesale revenue. This represents a 7-8% hit on BT’s normalised free cash flow over the medium term.
UBS, which has a price target of 110p after downgrading to a “Sell” rating last summer, warned that the partnership may not be the end of the bad news for BT.
While CityFibre’s target is eight million homes, UBS expects its ambitions will grow following the Sky deal and that this could mean the impact on BT doubles over time.
UBS said: “CityFibre is adding about 50,000 connections a quarter but we expect this to grow. We see a risk that Openreach has to cut fibre wholesale pricing to defend its position adding further downside – fibre pricing has already been reset twice.”
It also highlighted reports that Virgin Media O2 has revisited M&A discussions with TalkTalk, which is the second-largest customer of BT/Openreach spending an estimated £850 million.
TalkTalk has 3.6 million broadband customers, with its main infrastructure providers being Openreach and CityFibre.
UBS said: “Any potential acquisition of TalkTalk would give VMO2 a secondary brand to target the value segment of the market and yield potentially significant synergies from transferring subscribers over to the VMO2 network.”
The bank warns that a VMO2/TalkTalk deal could potentially put £385 million a year of Openreach revenues at risk. It added: “We reiterate our view that UK broadband infrastructure competition is increasing”
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