Broadband News

Big drop in BT share price over BT Italy scandal

BT Group PLC saw a big drop in its share price on Tuesday 24th January as the news emerged of a write down to the value of £540m against its operations in Italy as the result of improper accounting and various practices.

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The size of the drop is evident even when you look at the share price all the way back to 2002, and comes towards the end of a tough year where since February 2016 when the initial Ofcom review on the separation of Openreach from BT Group PLC started in earnest the share price has taken a steady downward path. On the Ofcom review we are still waiting for concrete action.

The levels of cash or investment available to the BT Group are important, as so far they appear to be the only ones stepping up to the challenge of a Universal Service Obligation though whether the conditions attached would be palatable to the Government is a big unknown, and while this news should have zero impact on existing BDUK contracts, the dynamic may change over time on how flexible or not BT is with regards to extra work around clawback and gap funding in community schemes.

The Government is pinning its broadband hopes on a pure fibre future, but while Openreach remains the largest FTTP operator in the UK the health of BT is important. Some of the pressures that are thought likely to feature in the next set of financials are pessimism over revenue from the UK public sector and this may be the result of CityFibre with the increasing number of metro fibre contracts with local authorities.

So far BT has kept its major shareholders on board with good dividends and while investment via Openreach is criticised for being too small, without major investors stepping up to say they are happy to support decade long investment plans of a several few £billion in a split or more functionally separate Openreach it is difficult to see Openreach doing much more than its existing plans of G.fast for ten million and FTTP for two million premises for a few years.

One advantage of the share price dropping might be that a full split to create an Openreach PLC is easier financially or conversely is more difficult depending on how you view the pension and other debts. The lower share price carries the risk of asset strippers moving in and while lots of people moan about BT sweating its assets now, groups looking to make a killing selling off the individual parts of the group are going to care little about that.

One aspect of Brexit that may impact on any firms plans to rapidly expand its pure fibre footprint is that the labour force for the tasks involved seems to already be under pressure, and sourcing cheaper contract labour from Europe to increase roll-out speeds may not be possible or not at a cost that is attractive. The reason why some Eastern European countries have high FTTP/B availability is the speed at which apartment blocks can be upgraded and where digging/trenching is needed the costs of doing so are much lower.

Comments

Just out of curiosity, how much of FTTP costs actually go to digging and trenching (=labour) and how much to planning, permissions, wayleaves, bureaucracy etc?

Should there be some kind of a blanket permission to allow these works without involving councils and landlords on individual basis?

  • hvis42
  • 11 months ago

An EU study highlighted the differences, e.g. Poland €23/metre for new ducting and in UK €62/metre

  • andrew
  • thinkbroadband staff
  • 11 months ago

So if the distance between two houses or blocks of flats is the same in Poland and UK, say 50m, price in UK would be 3000 and in Poland 1000 (not that simple but anyway). Accounting in differences in purchasing power, the difference disappears. And if divided by residents in a block of flats, peanuts. Still very little happens in UK.

  • hvis42
  • 11 months ago

To say very little happens, might be true overall, but a great deal of the new apartment blocks in London are Openreach or Hyperoptic these days. So options exist and are being used.

Retrofitting is a lot harder and needs co-operation from building owner.

  • andrew
  • thinkbroadband staff
  • 11 months ago

Hi Broadband Watchers.
Over the last few years Openreach staff 30K have been reduced and many are working self employed or for contractors Pole erection, cabling fibre treecutting etc even line managers have started there own firms and this has effected many contracts prices this could have even effected BRexit vote.

  • Blackmamba
  • 11 months ago

blackmamba -- this is hogwash of the highest order - this has effected many contracts prices

  • fastman
  • 11 months ago

*affected

  • 10forcash
  • 11 months ago

@hvis42
The usual breakdowns say that as much as 80% of the cost of FTTH comes down to the civil engineering. It wouldn't surprise me if there was 5-10% within that for project planning.

The BSG paper had this breakdown, that also breaks cost down by geotype:
https://s23.postimg.org/pqrjv49ez/BSG_2008_FTTP_Cost_Breakdown.png

The two civils costs on there look to be the majority

  • WWWombat
  • 11 months ago

Linking BT Italia and the USO needs explaining. All BT had had to do is turn up for the £1.7bn of state aid and use it to transform its network.
There is a resource issue but the transformation costs over say 15-18 years look manageable if some allowances in WLA 2017, and re-farming of clawback, capital due and underspends get converted into coverage in the more difficult areas. There is more public spend available if there is the appetite to go further. It is relatively cheap compared to all other infrastructure projects.

  • ValueforMoney
  • 11 months ago

I stand by my paragraph in the article.

Others are free to believe that the share price impact and cost write down will have NO effect on any future plans but I believe it will have some effect, how big only time will tell. So not sure what needs explaining.

  • andrew
  • thinkbroadband staff
  • 11 months ago

As for BT turning up to get £1.7 billion of state aid, my understanding was that this has not all been paid to BT yet, and for example Wales is highlighting that if contract targets are not meet there are financial penalties for not meeting the obligations under those contracts.

  • andrew
  • thinkbroadband staff
  • 11 months ago

There are very valid questions over whether investors in Openreach in current form or another form are willing to embark on another 15 to 18 years of investment at similar levels to now to get the majority of the UK onto FTTP.

As for public spend, if you have not noticed more and more public money is NOT going to BT but other smaller providers so that tap is getting closed off or being restricted. Vive la resistance.

  • andrew
  • thinkbroadband staff
  • 11 months ago

BT has currently billed for £900m of work and set to pay back £292m so far and more to come.

The Welsh contracts may need more allowances created because of the unit costs used rather than actuals.

But this is BT being paid with state funds to ungrade assets it will then own. Your suggesting this is hard for BT to accept state aid and do the work. This I am not understanding! It is hard to understand why BT is losing as it is needing to return funds when the gov just wants the networks upgraded.

  • ValueforMoney
  • 11 months ago

On FTTP, there is every reason to use the WLA 2017 discussions to include incentives for FTTP and encourage some invested to be switched from copper to fibre. OR as a stand alone looks pretty good. Funding wider Group Functions appear to be more problematic.

  • ValueforMoney
  • 11 months ago

You are talking about something very different to what I wrote about, since the USO is NOT part of the any of the BDUK contracts. Or do you contend that the BDUK project funding means that BT Group is the broadband USO holder already?

  • andrew
  • thinkbroadband staff
  • 11 months ago

As for encouraging OR to invest, have you missed the large hints from Ofcom that it wants to encourage others to invest, rather than encouraging BT or Openreach. Hence PIA2

  • andrew
  • thinkbroadband staff
  • 11 months ago

You cannot divorce £1.7bn in network upgrades from a discussion on a USO.
I am not in favour of a USO being defined until after 2020, we have the 4G coverage obligation to be enforced this year, which is a good starter.

  • ValueforMoney
  • 11 months ago

PIA 2 is rhetoric, private investors want their own assets.
Ofcom talk of but have not defined how much fibre access they want! The DCR is much poorer because of this vagueness.

  • ValueforMoney
  • 11 months ago

Hi Broadband Watchers.
TBB % results in Surrey grinding to a halt on their (10 USO map ) plus others stats. I cannot see any movement until the Q1 starts to kick in on the speeding of the £3.8 million plus OMR money clawback so the share price will not effect this in the coming 18 months. This area covers 450K customers.

  • Blackmamba
  • 11 months ago

Ofcom are in a confused state over what they want, without any attempt to tie the switch-off of the PSTN with a replacement of the USO. Nor, for that matter, a strategy that allows switch-off of LLU.

They seem to be rather good at putting their foot in to enforce a form of competition just as the technology they pin their hopes on becomes obsolete.

Witness, for example, the release of a report on 5G that suggests a rush for FTTH isn't well-founded.
...

  • WWWombat
  • 11 months ago

I don't attach significance in the state-aid (amount, or its existence) in the USO.

However, I do attach some significance to the level of superfast coverage ... that reaching ~95% is the point at which a USO (for some amount) becomes viable for the remainder.

But...
The nature of the USO differs regionally, based on who actually contributes towards the existing coverage (put in place commercially or via state-aid).

The CDS and Fastershire areas seem likely to see vastly different USO working than most of the rest of the country. VM might change things too even, with their rollout.
...

  • WWWombat
  • 11 months ago

But unfortunately, the USO is predicated on the existence of "spare money" in the industry - either within the businesses or within easy reach via finance.

The Italian job facing BT changes some of those factors. Perhaps not irretrievably, but it cannot be denied that things have changed.

  • WWWombat
  • 11 months ago

The growing capital deferral now at £325m can be used to push beyond 95%, securing this is more important than setting a USO too early.

  • ValueforMoney
  • 11 months ago

@ValueForMoney Have you not noticed that BT, DCMS etc talking about hopes to push superfast coverage to the 96%-97% markers before USO makes it on the statute books?

For the USO to be law it takes time, i.e. Parliamentary process still works to the same old world speeds, or we could adopt a new system of Government based on twitter announcements from an executive in sole charge

  • andrew
  • thinkbroadband staff
  • 11 months ago

@VFM
You're right. And it seems to be happening.

Who/what do you think might be in the way of "securing this"?

  • WWWombat
  • 11 months ago

@VFM

The decision is wholly down to the local BDUK projects.

  • TheEulerID
  • 11 months ago

Hi Broadband Watchers.
By the time the law is passed there will not be many Post Codes that cannot support 10 Meg with the introduction of G\Fast FTTC 6D-3DB and the overlaying with fibre so it will be down to the customer demand and switch. The last Q (12) rate churn and provision was good and if this is continued in simular vein the target will be achieved.

  • Blackmamba
  • 11 months ago

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