The Motley Fool

Should you buy BT Group plc following the Openreach deal?

Telecoms giant BT Group (LSE: BT-A) continued its recent recovery from January’s disastrous trading update with what, at first glance, appeared to be great news concerning the future of its Openreach division.

BT has of course long been at loggerheads with regulator Ofcom over the future of the division, with the company’s many rivals calling for a complete separation of its highly-lucrative infrastructure operations on competition grounds.

The telecoms play has avoided an imminent catastrophe after agreeing “a long-term regulatory settlement that will see Openreach become a distinct, legally separate company with its own board,” but which will remain part of the broader BT entity. The deal will see 32,000 BT employees and their pension arrangements transferred over to the new company.

The deal has also put to the sword fears of a long and protracted battle, particularly after Ofcom had earlier vowed to take the saga to European lawmakers to resolve. Indeed, the regulator has commented that the move avoids “the delays and disruption… associated with structural separation or the sell-off of Openreach to new shareholders.”

Temporary relief?

Broker UBS viewed the deal as a positive “in terms of removing a notable overhang, an absence of negative surprises and avoiding a prolonged period of uncertainty had Ofcom taken its case to the European Commission.”

But the bank believes the move could prove no more than a temporary sticking plaster, warning that “we see a risk that over the longer-term, Openreach could push to assert its independence, and legal separation is one step away from structural separation.”

And while BT’s update did not contain any news on capital expenditure or fibre rollout plans, UBS expects the City’s cost forecasts to move higher following Friday’s accord.

UBS believes BT may now speed up the rollout of fibre to the final 5% of British homes, as well as extending so-called fibre to the home (or FTTH) “depending on the outcome of the pending Wholesale Local Access (WLA) review that will determine whether there should be regulated pricing for fibre.”

Still packed with uncertainty

There are clearly still a lot of questions concerning BT and Openreach’s relationship that could have a devastating effect on the telecoms provider’s earnings growth in the near-term and beyond.

But of course, Openreach is not the only problem BT has to deal with. As well as facing rising costs to hang onto its infrastructure arm, the London company is also preparing to address its massive pension liabilities. The next state-of-play report is due for release during the summer.

Meanwhile, the group-wide accounting investigation prompted by the scandal at BT Italy could significantly amplify concerns over the strength of the company’s balance sheet. The size of the hole at its Italian operations alone has more than trebled from an initial November estimate and, as of March, stood at an eye-watering £530m.

There is clearly potential for plenty of bad news to seep coming out of BT in the months ahead, and to consequently drag the share price down to fresh multi-year lows. I believe risk-averse investors should keep giving the telecoms play a wide berth for the time being.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.