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Could this potential mega-deal cause the BT share price to double?

Investors have rushed to sell BT (LSE: BT.A) stock this year as the outlook for the global economy and the BT share price has deteriorated. Earlier this month, the group reported a 2% decline in revenue for its 2020 financial year. Adjusted earnings per share fell 11%, due to higher spending requirements.

BT also revealed earlier this month that the company would suspend dividends for the next year at least. This is the first time the organisation has not paid a dividend since its privatisation.

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With the bad news mounting up, it’s clear why the BT share price has fallen nearly 50% in 2020. 

However, the company is now reported to be on the verge of signing a significant deal, which may lead to substantial share price gains, if approved.

A big deal for the BT share price

BT has been facing pressure from regulators and investors to increase spending on network infrastructure over the past few years. Management has been struggling to balance the books to do this efficiently. As a result, progress has been slow.

But the coronavirus crisis seems to have forced BT into action. According to reports, the company is in negotiations with large infrastructure investors to sell a chunk of its Openreach business. This could be a huge deal for the BT share price. 

This is one of the most profitable parts of the BT empire. Regulators forced the two businesses apart seven years ago, so they’re legally separate companies. However, both entities have billions in shared assets and liabilities, so it’s been impossible to separate the two entirely. BT remains the owner of Openreach.

City analysts have suggested Openreach could be worth as much as £22bn as a separate business. To put that into perspective, the current market capitalisation of the entire BT group is just over £10bn. These numbers suggest the BT share price could double if it can divest a large chunk of Openreach.

No guarantee

There’s no guarantee that deal will materialise. There’s also no guarantee the BT share price will double if the company can raise several billion pounds from a transaction.

The firm needs to spend an estimated £12bn over the next few years on its network. On top of this, restructuring costs are expected to come in at £1.3bn over the next five years. That’s without taking into account BT’s £50bn pension liabilities and £18bn of net debt.

Therefore, while selling a stake in Openreach could produce a large chunk of cash, it may not have a significant impact on the BT share price. The group is facing an increasingly competitive environment, capital spending costs are rising, and borrowing remains elevated.

A lack of dividend income also reduces the appeal of the stock at current levels. With so much debt on the balance sheet, the BT share price may never offer a dividend again.

So, if it’s income you’re after, it may be better to look elsewhere.

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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.