The BT (LSE:BT-A) share price is down 28% this calendar year. During the same period, the FTSE 100 index is down only 15%. Over the past two years the telecoms giant has lost over half of its value. The share price is now so low, it is rumoured to be an attractive takeover target. So what is next for the BT share price?
Share price woes
There are plenty of reasons why the BT share price has plummeted. The company has net debt of £18bn and pension liabilities of £50bn. The interest payment on the pension deficit alone is over £700m a year.
The roll out of Britain’s 5G network was meant to be an excellent opportunity to revive the companies fortunes. However, the government restrictions on the use of Huawei products will cost the company £500m.
Despite its huge debt, the company is still obligated to find an estimated £12bn to upgrade the nation’s fibre network by the end of the decade.
The share price reached its lowest point when it was announced the dividend payment was being cancelled until 2021–22.
There are positives
The jewel in the crown is Openreach. This is the fixed network arm of BT and is responsible for maintaining the UK’s telephone and broadband infrastructure. The division is highly profitable and has a virtual monopoly in its sector.
The performance of mobile phone network EE has been a positive. Implementing cross-business synergies since its acquisition has largely contributed to its success.
Revenues at BT Sport predictably suffered due to the cancellation of live sport in the spring. However, the recommencement of Premier League football and other sports provides a unique television offering. This guarantees regular revenues from monthly subscriptions.
Implementing cost cutting measures is essential to help fund the Openreach infrastructure improvement programme. The company aims to reduce operating costs by around £1bn each year by 2023, rising to £2bn each year from 2025. The decision to cancel the dividend until 2021–22 will help.
If BT can reduce its debt burden and re-invest the proceeds successfully, there is no reason why the share price will not rise in the long term.
Share price recovery?
The share price fall values BT at just £10bn. The price is so low the company is on alert for potential takeover approaches. Investors have reacted positively to this news, which has led to a mini-share price bounce this week. Openreach is the main attraction for any party contemplating a takeover bid. It is currently valued at twice the price of the parent company.
Any potential takeover will be very difficult to facilitate. It is a highly regulated business and new owners will have to guarantee the security of the pension liabilities. The future of BT is not just a business issue, but a very politically sensitive issue.
It seems to me that for every pound BT saves, it needs a further two pounds. One pound to invest in capital investment programmes and one to reduce its debt pile. I think this cycle isn’t going to end any time soon and do not foresee a sustained share price recovery.
