European stocks went just a little bit bonkers last Friday. Well, that’s if you define the FTSE 100 wiping £72bn worth of market value off the exchange as just a ‘little’ concerning. Still, Friday’s 3.6% loss was relatively mild considering the news that a new coronavirus variant is now making landfall in Europe. The BT Group (LSE: BT.A) share price did not seem to take the hint at all though. On the contrary, it’s up 9.5%. It seems while everyone was focused on the latest version of the virus, the market had its sights set on India.
Rumours from the east
This morning the Economic Times reported that Reliance Industries, India’s largest company by revenue, has apparently taken an interest in BT Group. Headed by India’s leading billionaire, Mukesh Ambani, Reliance Industries is the parent company of telecoms giant Jio. Ambani’s ambition to establish a European telecoms presence was made clear by his bid in August 2021 to obtain the Dutch arm of T-Mobile. After being outbid, he has now turned to BT Group. The deal, if successful, would be the largest outgoing M&A deal involving an Indian company, ever.
The market is pricing in the mere potential of a deal into the current BT share price. The advantages of such a marriage to both Jio and BT Group are evident straight away. As the largest mobile network operator in India and the third-largest in the world, Jio benefits from a 443 million-strong subscriber base. This comes with immense pricing power within Indian markets. As a matter of fact, Reliance shares went up 3% earlier this morning on news that Jio would hike its tariffs by 20%. BT Group is of course no slouch itself, currently commanding a leading 28% of the British telecoms market.
To buy or not to buy BT shares? That is the question
The first thing to note is that the news fuelling BT’s share price hike is purely speculative at the moment. Neither BT Group nor Reliance has confirmed or denied the rumours. If this union materialises, I’m sure the price would rise. But I would not buy based purely on the current news. That being said, as a value investor, the basic fundamentals underlying this business do interest me.
Historically, BT Group has never been a high netting business, as it simply doesn’t have the pricing power. This is concerning given the that it currently holds 28% of the market share in the UK. Coming from a legal background, I know that competition authorities probably won’t let it get much more. Its inability to impose pricing power with a leading market share position indicates a lack of any durable competitive advantage. A debt-to-equity of ratio of 1.96 means that BT Group is carrying an uncomfortably high level of debt on its balance sheet. If this debt was translating to better results for shareholders I’d be a bit more bullish – but it’s not. Its current return on equity of 8.8% is almost 5% below the industry average. Should Reliance come through and buy BT Group that could confer some benefits that may warrant a re-assessment. For me, though, from a value perspective, I would not buy BT Group right now.
