The race for super-fast Internet access is on, as Ofcom gives the green light to BT’s next-generation network. Will BT leap-frog Virgin for the fastest in the country?
Since my first musings on BT Group (LSE: BT-A) last week, there has been some welcome news for shareholders. Ofcom has given its nod to BT's plan to build a new super-fast fibre optic network.
BT, planning to invest £1.5bn in this major rebuilding of its infrastructure, had made it clear that the project would only go ahead if the regulator would allow it to make a fair return on its investment. And yesterday, it seems the company got what it wanted.
The last mile
Since privatisation, BT has been in possession of a major asset in the form of the existing copper network that reaches from local exchanges to our households. The great advantage that gave BT over its new rivals was the reasoning behind the stringent regulatory regime it has been operating in ever since.
But that old-technology network was something of a bittersweet legacy. As BT's cable rivals, Telewest and NTL (now both subsumed by Virgin Media), rolled out their new networks, they leapt ahead of BT's capacity for delivering content. And while BT has managed to get its domestic ADSL Internet service up to a nominal 8 megabits per second (mbps), Virgin already has a nominal 20mbps service widely available and is aiming to offer 50mbs to about half the population by the middle of this year. And there's nothing BT can do about that with existing copper wires.
Deregulation
Ofcom has clearly recognised that BT's old monopoly advantage plays no part in its new plan, with chief executive Ed Richards saying "Our message today is clear: there are no regulatory barriers in the way of investment in super-fast broadband". BT will be free to set its own prices for access to its new network, which means it can charge higher prices for super-fast broadband. BT now plans to reach at least 40% of UK households by 2012, with initial speeds of 40 to 60mbps.
The news doesn't seem to have filled the market with enthusiasm, however, with the share price barely having budged.
Show us the cash
The mooted £1.5b investment is a lot of money, and in recessionary times cash really is king, so investors today will be concerned about BT's debt situation. At the third quarter mark in December 2008, it was sitting on a net debt of £11b (up slightly from the previous year). Profits were down too, due to a poor performance from BT Global Services and one-off charges of over £300m.
But the biggest concern must be the company's large and growing pensions deficit. Pension deficit payments of £320m were made in the year to March 2008, and the company is facing a review of its pension scheme in May this year which will be conducted in accordance with stricter accounting principles than previous reviews.
BT places the deficit at £1.7b in December 2008, up massively from £0.6b just three months earlier as the value of its pension fund investments was badly hit by the fall in world markets. It now seems likely that May's review will see this figure re-adjusted upward, raising the possibility of greatly increased deficit payments over the course of the next year, with the spectre of a dividend cut looming.
Is it overdone?
While it is easy to understand investors' fears, the current share price looks as if it already reflects much of the bad news. Even if dividends for 2009 and 2010 are slashed by half from current forecasts, the shares would still be showing a dividend yield of about 5% for both years. And if earnings come in as forecast, with a P/E of around 5 it may well be that there will never be a cheaper time to buy BT shares.
On the other hand, investors might feel that, being about three years behind its rival, BT has missed the broadband boat and will lose market share in the coming years. Or, at least, that there's plenty of time to wait and see how things progress.
Personally, I'll at least be waiting for the outcome of the pension review, as any significant increase in the deficit could easily spook investors further, even at the current low share price.
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