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BT could benefit as Ofcom displays softer stance on regulatory plans, say analysts

Ofcom has demonstrated muddled thinking on its plans to cut Openreach's wholesale prices, Numis said

BT has received mixed reviews from analysts

BT Group plc (LON:BT.A) may benefit from Ofcom’s intention to make sure telecoms regulation supports investment in the UK’s fibre infrastructure, analysts said.

Shares in BT rose 1.20% to 285.60p in morning trading. 

The telecoms watchdog provided an update on its regulatory thinking yesterday in a meeting, saying that fibre to the premises (FTTP) is a 10-year investment in the UK that requires multiple operators.

FTTP provides an end-to-end fibre optic connection from the telephone exchange to the building and delivers faster speeds than fibre-to-the-cabinet (FTTC) as there is no copper cable.

“Given the limited current rollout we believe there is ample room for BT and third-party operators to roll out networks,” said analysts at Macquarie.

Macquarie said BT remains its top pick among European large-cap operators and repeated an ‘overweight’ rating and target price of 355p.

Ofcom chief executive, Sharon White, and strategy group director, Dr Steve Unger, supported a model where BT’s network Openreach accessed and resold third-party FTTP and BT’s retail division could act like any other service provider.

“In our view, Ofcom was very pragmatic and is keen to see an increase in FTTP builds, ensure the economics of third-party network investment are sustainable and improve customer service levels,” Macquarie said.

Macquarie added that the regulation of entry level broadband is a "step change" but there is no intention to regulate higher speeds or fast and FTTP.

READ: BT shares gain after Ofcom forced to revisit rules on broadband market

Ofcom displays 'muddled thinking'

Numis said Ofcom has displayed “muddled thinking” on its plans to cut Openreach’s wholesale prices for FTTC. 

During Ofcom’s meeting yesterday, competition director Jonathan Oxley said there was no evidence that cutting the price of the most popular FTTC will pressure the price of higher speed services and therefore hurt investment in Britain’s fibre infrastructure.  

FTTC involves running fibre optic cables from the telephone exchange to street cabinets, which then connect to a standard phone line to provide broadband using a copper cable.

Yet in Ofcom's consultation document on Openreach wholesale prices in March, the regulator said it believes there will be “fairly strong substitutability” between different superfast broadband services that are currently being delivered by fibre and cable.

It said this would pose a “constraint on the higher speed services being developed using new technologies”, including ultrafast speed broadband services.

In contrast Oxley said BT's "fair bet" investment in FTTC has paid off and ignored Virgin Media Inc's (NASDAQ:VMED) written submission to Ofcom, which said: "Why would the fact that BT had passed its expected payback date on its FTTC investment mean that charge controls now [e.g. cutting the price for 40/10Mbps upload speed FTTC] would have no impact on competitor investment incentives?".

A decision on its proposal to cut Openreach’s wholesale price for FTTC on upload speeds of 40Mbps download/10Mbps by 21-56% between 2019 and 2021 will be made in early 2018.

READ: Charges 'mounting' up at BT, but it may not be all doom and gloom

Ofcom's wholesale price cut will be less than the midpoint of range proposed, says Numis

Numis said these stark contrasts on the proposal show Ofcom is "not sure-footed" on the issue and reiterated its view that the actual cut will be “meaningfully less than the midpoint (41%) of the range being consulted on currently.”

The broker believes this is bullish for BT at the current share price and repeated a ‘buy’  rating and target price of 390p.

Virgin Media is opposed to the proposal as it believes it could lead to Openreach freezing spending on all core and alternative ultrafast networks in Britain

“This matters because Ofcom’s core aim remains to effect investment in scale, alternative all-fibre networks; the Digital Economy Act 2017 now compels Ofcom to facilitate the government’s strategy to maximise spend on Britain’s allfibre infrastructure; Virgin Media remains by far the biggest investor in alternative ultrafast connectivity; Virgin Media believes Ofcom’s proposal will chill spend on all (core and alternative) ultrafast networks in Britain; Virgin Media thinks its parent, Liberty Global, may as a result of Ofcom's proposal switch investment from the UK to elsewhere in Europe,” Numis said.

Ofcom remains committed to plans, says Deutsche Bank

Deutsche Bank, however, took a different view on Ofcom’s meeting. The bank believes Ofcom remains committed to improving competition and will stay on the path laid out initially in its consultation document for cutting wholesale prices.

“On criticism of squeezing BT, Ofcom replied that is not a rate of return regulator but is incentive based,” the bank noted.

“Though as it happens BT is making regulated returns, materially higher than its WACC (weighed average cost of capital )so there is room for squeezing but rate of return regulation is not the long-term approach.”

Deutsche Bank maintained its ‘sell’ rating on BT and target price of 265p.


Quick facts: BT Group PLC

Price: 140.85 GBX

Market: LSE
Market Cap: £13.97 billion

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