BT (LSE: BT-A) has transformed itself over the past decade, and the latest stage in the company’s transformation will be the acquisition of mobile network provider EE.
Unfortunately, as BT tries to seal the deal, the company is attracting an increasing amount of criticism regarding its dominance over the UK’s broadband market.
Main provider
BT is the main provider of fibre broadband infrastructure within the UK. However, as the company has such a vice-like grip over the broadband market, rival groups have started to push for the separation of the division that operates the network, Openreach.
The recent flurry of criticism is a result of a call by the Competition and Markets Authority for comments on BT’s acquisition of EE. It is claimed that after BT and EE have merged, EE will acquire all of its fibre infrastructure from BT, impacting other, smaller providers, which are trying to gain a foothold in the market.
Indeed, start-ups like CityFibre, as well as telecoms giants such as Vodafone, TalkTalk and Sky, are all starting to provide high-speed fibre networks. These networks often boast connectivity speeds that are many times faster than the speeds offered by BT.
What’s more, over the long term BT is planning to use the acquisition of EE — as well as the company’s monopoly over the UK fibre network — to move all of its offerings on to a single, internet-based platform. As a result, the group will be able to provide broadband, TV, mobile and landline services from one platform.
Mobile domination
There are also concerns about the amount of mobile spectrum that BT and EE will control if the buyout goes through. And it’s not just the BT-EE deal that’s causing trouble on this front. Three’s deal to buy O2 means that between BT and Three, the majority of the UK’s mobile spectrum capacity will be owned by only two operators.
This factor alone could put the deal on ice. Regulators have strived for years to maintain a four-player market. The CMA usually considers the surrounding market when weighing up the effect any deals will have on competition.
Should you be concerned?
But should investors be concerned about the prospect of a break-up? Well, it depends which part of the business BT is forced to divest.
Splitting up EE would impact BT’s growth potential, although this could mean that BT would be allowed to keep control of its Openreach division. Considering BT’s long-term plans for an internet based offering, the company’s grip over the UK’s broadband market is essential.
However, if BT was forced to divest its Openreach arm, the company would have to redraw its future plans. Although, Openreach is a relatively low-margin business, so a partial sale of the division could work in BT’s favour.
With so much uncertainty on the horizon, BT’s premium valuation appears to be unwarranted. Indeed, the company currently trades at a high forward P/E of 15.4.
