Shares in BT Group (LSE: BT.A) are looking like a very tempting prospect — at least if you look at the share price fall and believe that what goes down must come up. BT shares have lost 25% of their value in the past 12 months, 44% over two years, and a whopping 56% since the peak in November 2015. Must be oversold, yes?
That was my conclusion when I last examined the telecoms giant in July. But at the moment I’m looking over some of our top FTSE 100 stocks, from a Buffett-esque “don’t lose money” perspective, and actively looking for reasons not to buy them. And for BT, there’s very much a downside.
Sports
One thing that had impressed investors was BT’s aggressive approach to acquiring rights to sports content to show exclusively via its own delivery channels — even outbidding Sky for some potentially lucrative football rights. But it’s now looking like Sky was the canny contender in the battle, and that BT paid more than was financially sensible.
BT has been backing off from that approach, pulling out of bidding for a number of sports exclusives (including Italian Serie A football). I see that as a sound commercial move now, but I can’t help worrying that there’s a lack of perspective at the board level. Back when BT was winning all those rights, I assumed they’d worked out a sensible maximum bid level and knew what they were doing, but that has obviously been cast into doubt now.
Pension
Then there’s the pension fund deficit. It’s easy to see it as a millstone that will eventually go away. And it is coming down, with the last reassessment showing a £1.8bn reduction at 30 June to £4.6bn, down from £6.4bn at the end of March.
That sounds impressive, but only part of it is down to BT’s deficit contributions, while some is down to accounting changes. And, worryingly, the March figure had previously suffered from a £500m error by the company’s actuary. While that wasn’t a direct BT failing, it increases my twitchiness slightly when pondering the company’s financial skills.
Debt
Then there’s the debt situation. At the end of June, the figure stood at £11.2bn — and that’s a lot of money. Worryingly, in these days when BT is apparently working on cost reduction, that represents a whopping rise from £8.8bn a year previously. It is only 1.6 times the firm’s annualised EBITDA (based on the first-quarter figure), and that’s generally considered well within manageable levels.
But when you add it to that pension deficit, the total of £15.8bn is the equivalent of more than 70% of the company’s market capitalisation.
And all of this comes after the accounting scandal at BT’s Italian operation, which resulted in the value of that business being written down by more than £500m after years of improper accounting practices.
Shake-up
But before we give up on BT’s financial acumen, my colleague Roland Head has pointed out that the forthcoming departure of chief executive Gavin Patterson means a new leadership, and that we should be looking at annual cost savings of around £1.5bn after three years of the company’s new austerity focus.
Has all this changed my take on BT? While there’s clearly still a lot wrong, I still think we could be past the worst.
