Can BT Group cope with a backseat driver in the boardroom?

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BT Group PLC is unlikely to get an easy ride from new shareholder and likely new board member Patrick Drahi, at least that’s a view emerging in the City of London.


The French billionaire last week spent some GBP2bn to acquire 12% of the British telco’s shares.


Drahi arrives on the shareholder register with a reputation for deal-making and, according to analysts at JP Morgan, he is unlikely to be satisfied by “modest” double-digit return on his investment in BT.


Drahi, via his vehicle Altice, has “ambitious return expectations for all of his investments” and he’s not likely to simply be a passive shareholder, says JPM, which expects Altice to gain a seat on the board.


JPM suspects that Altice’s strategic focus will be on accelerating BT’s infrastructure monetisation, towers and fibre, along with ‘financial engineering’ initiatives, or shifting capex off the balance sheet.


The American bank, which repeated an ‘overweight’, reckons Drahi’s entry confirms an upbeat view on BT’s cash flow and also suggests the risk posed by new private equity-backed fibre optic network operators is over-estimated.


With a 225p price target, JPM sees some 30% upside to BT’s current price of 195.5p.


Altice went on record quickly, and somewhat customarily, to say it won’t make a takeover bit for BT, but, an initial City consensus sees a push for the break-up of the group as potentially an alternative proposition.


Who is Altice


Drahi’s Altice is now France’s second-largest mobile phone company and a significant player in the US.


It was formed and grown through a series of carefully selected acquisitions mostly using debt finance.


A watershed was the 2013 acquisition of SFR, which was formerly a partner of and part-owned by Vodafone. Vivendi bought out Voda in 2011, before selling the business to Altice two years later.


By 2015, Altice bolstered the group further with the acquisition of US telcos Suddenlink Communications (a 70% stake) and Cablevision for S$9bn and US$18bn respectively, before merging the American units – today the combined group, Altice USA Inc (NYSE:ATUS), has a market cap of around US$16bn.


Why is Altice targeting BT?


The analyst view on BT is that the UK telco has its problems, but, a big prize is on the horizon as it will soon benefit from a significant first-mover advantage, once a new fibre network is up and running.


At such a point the network will flip from being a cash drain to a cash cow.


Nonetheless, challengers are lurking.


So-called ‘altnets’ such as CityFibre are targeting some of the most lucrative urban territories, whilst the Virgin-O2 merger presents another potential headache.


Intriguingly, however, major rival Vodafone has recently hinted it might be prepared to invest in Openreach.


On top of that, BT has shareholders that are used to getting a meaty dividend and there’s still is a pension fund deficit to fill.


One option floated is a break-up and splitting off of the Openreach arm, analysts reckon the network unit is worth up to GBP25bn at least – something that’s speculated to be potentially of interest to Altice.


It remains to be seen precisely how it will all play out, but, should a noted dealmaker get a place on the board it’s evidently not to take the role of passenger.

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