BT shares received a fillip in June when Altice, the telecoms group founded by French billionaire Patrick Drahi, has taken a 12.1% stake in the UK telecoms giant, since when the shares have declined by around 15%, which broker Jefferies puts down to concerns over Virgin Media O2’s (VMO2) announcement that it will upgrade 14.3mln homes to “fibre to the premises” (FTTP) by 2028.
This is seen as a wholesale threat and opportunity for VMO2 to attract co-investment from Sky but Jefferies thinks Sky would have more to gain (and less to lose) by getting into bed with BT’s Openreach instead.
“With two large BB [broadband] operators committed, could a VMO2/Sky network attract an infra investor at a valuation that would unlock a lot of cash? We would not rule out LBTY/TEF [Liberty Global and Telefonica] prioritising such a scenario over the long-run prospects of a retail business that would be severely undermined by diversifying into w/sale but we see no logical incentive for Comcast (NASDAQ:CMCSA)/Sky to commit itself as a VMO2 anchor tenant,” the broker said.
“For Comcast, the security of Sky’s increasingly streaming-focused retail activity is paramount and wholesale experiments create risk. Moreover, Openreach’s FTTP overbuild of legacy cable – where Sky has just ~18% BB market share – creates a lower-risk retail opportunity,” it argued.
BT’s own commitment to ramp up FTTP, announced last May, presents the possibility of a squeeze on free cash flow (FCF), which might endanger the dividend.
“Our updated analysis shows BT should exit FY22/23 with GBP3.8bn tax losses to c/fwd, generating relief vs taxable profit for six years, protecting FCF through the whole FTTP build period,” Jefferies said.
It is forecasting a dividend of 7.7p for the current fiscal year (FY), to be held through to fiscal 2024.
The broker’s 12-month target price forecast is 260p.
BT shares currently trade at 177p, up 0.1%.