In the days after Philip Jansen was named as the next chief executive of BT, taking on the herculean task of reviving the fortunes of the then beleaguered telecoms group, enthusiastic investors gave its shares a rare boost that sent its market value to more than £26bn.
Just over three years later, Jansen, despite making good on his vision, helms a business that investors now value at about £16bn, and faces the prospect of a showdown with his new largest shareholder over what the future should look like.
Patrick Drahi, the French-Israeli telecoms billionaire and founder of Altice, is known an aggressive investor with a penchant for cost-cutting at businesses he controls. He is free to make his next move from 10 December with the expiry of a no-bid clause that was triggered under UK takeover rules when he took a 12.1% stake in BT through his Altice in June.
But to date Drahi has played the benevolent investor card with words of support for BT’s management and strategy, and hired Flint, the business advisory firm co-founded by the former Ofcom chief executive Ed Richards, to assuage the concerns of MPs and regulators regarding his intentions toward one of the UK’s nationally strategic assets.
“Drahi is an activist private equity investor,” said one City source. “While there may or may not be an immediate move when he is free to make one, by that definition he is not there to sit on the sidelines.”
While BT’s share price remains stubbornly depressed, down 70% since 2015 when Gavin Patterson was chief executive, low valuations and the promise of future profits from the rollout of full fibre broadband and 5G networks means the telecoms sector has got its mojo back for bargain-hunting opportunists.
Last week the US private equity firm KKR proposed a “friendly” €10.8bn (£9.2bn) buyout of the struggling Telecom Italia, which, like BT, is a former state monopoly playing a key role in the rollout of next-generation infrastructure, and is trying to pull it off with the blessing of a government that indirectly holds about a 10% stake.
On Monday BT’s share price rose 6% after a report that Reliance Industries, the India-based conglomerate controlled by the billionaire Mukesh Ambani, was weighing up either a takeover move or buying a stake to become the controlling shareholder. However, hours later Reliance put out a statement “categorically denying” the “baseless” report.
BT shares are down by about 30% since Jansen became chief executive in February 2019, but they have rallied in the last year as his strategic plans have started to pay off. The regulatory path has been cleared to guarantee solid long-term returns from a £15bn investment in full fibre rollout, a new £2bn cost-cutting plan is in place after the previous target was hit 18 months early, and last week its subsidiary Openreach told analysts it expected to remain in growth mode over the next decade despite increased competition from rivals such as the newly merged Virgin Media O2.
“We call it UK on sale,” said Neil Campling, a media and tech analyst at the Swiss financial firm Mirabaud. “There are so many UK public companies that are trading at valuations well below peers in other countries that makes them extremely attractive to many, and BT certainly ticks that box as well.”
Tim Höttges, the chief executive of Deutsche Telekom (DT), BT’s second-largest shareholder, recently said he was “entertaining all options” regarding the UK company.
An “easy option” for Drahi to pursue in the short term, according to one analyst, would be to build his stake, potentially looking to acquire the 12% controlled by DT. DT has held the stake in a passive capacity as a legacy of BT’s takeover of the mobile operator EE in 2015. The German telecoms group, which moved the stake to its pension fund in 2018, previously decided against taking up an option to raise it to 15%.
For Drahi, who could look to increase his direct influence by joining DT with a seat on BT’s board, a full-blown takeover would probably prove to be the hard option to take.
There are growing concerns about the threat to Britain’s economy and national security from a string of recent takeovers of UK companies by foreign rivals and private equity firms. The government has ordered investigations into deals including the $54bn (£40.6bn) takeover of the Cambridge-based chip designer Arm by its US rival Nvidia. From January the government will gain tougher powers to block the takeover of key national assets under the National Security and Investment Act 2021.
“I view BT as an operation of strategic national importance,” said Carl Murdock-Smith, a co-head of telecoms research at the German investment bank Berenberg. “I would be surprised if politicians would be comfortable with it being taken private by Patrick Drahi. If you are trying to do it, you want it done holding hands with the government. But would the UK government look to take a stake in BT like Italian state lender CDP does in Telecom Italia? No, but it would still not be comfortable with Drahi becoming a majority shareholder.”
Rumours that a defensive BT has explored radical ideas including a spinoff of its consumer arm EE seem unlikely to materialise, or at the least would be complicated to realise, given it is locked into an asset-backed plan to reduce Openreach’s £4.6bn pension deficit. The intermittently speculated potential sale of a stake in or spinoff of Openreach, which controls most of the UK’s broadband network, is likely to be viewed as a longer-term prize.
“In the very long term Openreach is a spinoff candidate,” said Murdock-Smith. “But in the near and medium term the pension deficit continues to be an issue.”
While BT has moved to a war footing, the former Royal Mail and ITV boss Adam Crozier officially takes over as chair on Wednesday, and the boutique bank Robey Warshaw has been drafted in as defence advisers, Jansen has previously thrived working within the auspices of the private equity ownership model.
In 2010, Bain Capital and Advent plucked him from running the European operations for the catering group Sodexo to head the UK food delivery company Brake Bros. Three years later he moved to WorldPay, again owned by Bain and Advent, going on to make an estimated $100m from the flotation of the company in 2015 and subsequent buyout by a US rival in 2019.
“Jansen hasn’t had a problem working with PE before,” said Campling. “He has done a good job laying the groundwork, BT is on a good path, there is definitely frustration with the share price but he is executing well. If there was a stage two of that, away from the public eye, I don’t think he would have a problem doing that. Why not take it private, get paid for the deal, improve it, bring BT back to the market three years later?”