Why Neil Woodford Is Backing BT Group plc’s Takeover Of EE

Master investor Neil Woodford sees a bright future for BT Group plc (LON:BT.A).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Press speculation last month suggested BT Group (LSE: BT-A) (NYSE: BT.US) was eyeing up an acquisition of a UK mobile network operator: either O2 (demerged from BT in 2001 and now owned by Telefonica) or EE (jointly owned by Deutsche Telekom and Orange).

BT confirmed the rumours, and has this week announced it’s entered exclusive negotiations to acquire EE for £12.5bn in a cash and shares deal.

Initial scepticism

Renowned fund manager Neil Woodford was initially sceptical about the merits of such a deal. While BT already had plans for providing enhanced mobile services of its own, the prospect of a mega-acquisition was a whole different ball game, challenging Woodford’s previous investment thesis for backing the company.

According to one of Woodford’s team:

“The investment case has increasingly represented a cash return story over the last couple of years. As capex on the £3bn commitment to rolling out fibre starts to decline and revenues from customer subscriptions ramp up, we had envisaged improving cash flows and substantial growth in dividend payments”.

Naturally, Woodford was initially nonplussed by the idea of cash flows being directed towards acquisitions rather than back to shareholders.

From scepticism to enthusiasm

On further consideration, though, Woodford’s team have embraced BT’s strategic move, and are excited by the company’s “opportunity to become dominant in taking the ‘quad-play’ fight (broadband, fixed line telephony, pay TV and mobile) to the competition”.

They see a number of long-term benefits for the business, and thus for long-term shareholder value:

“Free cash flow prospects should ultimately be far more robust from the enlarged entity, less reliant on price increases and cost rationalisation, with the focus moving to meaningful growth from a cross-selling strategy. This should result in more management control and less susceptibility to price-based competition in the fixed-line market”.

The price is right

Not all analysts reckon BT has got a good deal. According to Deutsche Bank, BT’s offer is “more expensive than expected”; this “after some serious speed dating”.

Woodford’s team has a different view:

“BT has taken full advantage of its unusual position in these negotiations as a sole buyer with two keen sellers. It looks like a good price, particularly when considering the substantial cost synergies in areas such as IT, back office and procurement, which make the financial logic behind the deal even more compelling”.

If Woodford and his team are right on the pricing of the EE deal, and on the enhanced prospects for the enlarged group, BT, which is the CF Woodford Equity Income fund’s fifth-largest holding at 6% of the portfolio, could be a big long-term winner.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »