How BT Group plc Could Be Broken Up To Create The National Grid plc Of Broadband

A break-up of BT Group plc (LON:BT.A) could create a stock like National Grid plc (LON:NG)

| 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.

Both Sky and TalkTalk have called for BT (LSE: BT-A) to be broken up after Ofcom launched a review into the structure of the telecoms sector this week. They particularly have BT’s wholesale broadband division Openreach in their sights. Sky CEO Jeremy Darroch said Ofcom must address “Openreach’s conflict of interest as a subsidiary of BT”, whilst TalkTalk’s CEO Dido Harding said it was crucial to “seize this opportunity to structurally separate” Openreach.

Openreach was created by the last Ofcom review in 2005 to create a level playing field between BT and other broadband re-sellers such as Sky, TalkTalk and Virgin Media. It owns and operates the network of cables that connect homes and businesses, and is obliged to treat BT and the other broadband companies at arm’s length. But critics argue that BT can manipulate pricing to benefit itself at the expense of competitors, and use Openreach’s cash flow to support its business.

There are good break-ups and bad break-ups

Shareholders in BT might well shudder at the possibility of a spin-off. Labour leader Ed Miliband’s plans to break up banks and energy companies has gone down like a lead balloon — as have the stocks of the energy companies.

But I think it could prove an enticing prospect.

Openreach would be an attractive investment if it were floated. Last year it made £1.2bn of operating profit, around a third of BT’s total. Its prices would no doubt be regulated by Ofcom, to enable it to make a fair return on capital and also invest in upgrading the nation’s broadband infrastructure. The security of its privileged monopoly position would enable it to gear up its balance sheet, boosting shareholder returns whilst remaining a safe, bond-like investment.

That’s remarkably like the situation of National Grid (LSE: NG) (NYSE: NGG.US) in the energy market. It’s no accident that the monopoly provider of high-voltage electricity and gas mains is a favourite amongst retail investors. The company’s eight-year regulatory agreement means it can weather the storms of elections, Grexit, Brexit, Frexit, the softening Chinese economy and the hardening US dollar, possibly even a Martian invasion, whilst still expecting to increase dividends on a current yield, at 5%, that trounces cash. The need to replace creaking infrastructure adds growth to the mix.

Efficient market

The rump of BT — the remaining 2/3rds plus mobile operator EE which BT is acquiring — would look more like its competitors in the telecoms sector. That’s not just good for competition, it should help investors to compare players, and choose between management teams and business models. The more efficient the market, the better for investors.

Ofcom will report preliminary findings at the end of this year, and there will be many twists and turns in the story. But BT shareholders should have nothing to fear from talk of a break-up; quite the contrary.

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.

Tony Reading owns shares in National Grid. The Motley Fool UK has recommended Sky. 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

Investing Articles

Buying 1,019 shares of this FTSE 100 monopoly could earn me £2,284 in passive income

National Grid’s monopoly status makes it a popular passive income stock. But investors shouldn’t underestimate the risks that come with…

Read more »

Investing Articles

£5k in savings? Here’s how I’d aim to build a rising passive income of £5,500 a month

Harvey Jones invests in FTSE 100 dividend stocks with the aim of generating a growing passive income to fund his…

Read more »

Investing Articles

Are these 2 legendary dividend stocks worth buying and holding until 2030?

Zaven Boyrazian explores two of the UK's most legendary dividend stocks with tremendous track records. But are they good long-term…

Read more »

Investing Articles

I’d listen to Warren Buffett’s advice and buy undervalued shares today

Warren Buffett’s focus on quality at a reasonable price has proven to be a highly lucrative strategy that other investors…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

How I’d aim to turn an empty ISA into a £50k second income!

Zaven Boyrazian outlines how investors can target a £50,000 second income starting with a brand new ISA while also keeping…

Read more »

Investing Articles

Up 202%! This hidden FTSE gem has outpaced the Rolls-Royce share price and is still climbing!

The Rolls-Royce share price may have outpaced every FTSE 100 rival over the last couple of years but Harvey Jones…

Read more »

Investing Articles

How I’d invest my first £1,000 in a SIPP

Investing the first £1,000 in an SIPP can be a daunting process, especially for new investors. Zaven Boyrazian explains what…

Read more »

Content white businesswoman being congratulated by colleagues at her retirement party
Investing Articles

No savings? I’d drip feed £500 a month into UK shares to retire in comfort

Worried about retiring with no savings? Zaven Boyrazian explains how investors can aim to boost their wealth for the long…

Read more »