Banking

Private equity firms send value of BT cable arm to £40BN

Private equity firms and investment funds are sizing up BT’s Openreach division as the telecoms giant braces itself for a potential shake-up triggered by its largest shareholder, Patrick Drahi. 

Sources told the The Mail on Sunday that potential suitors – said to include private equity firms CVC and Apax, and infrastructure investors Brookfield and Macquarie – had run fresh analyses on the value of Openreach that could price the cables division at an eye-watering £40billion. 

Bankers are preparing for a potential bidding war over a possible stake, or even the whole of Openreach, sparked by pressure from Drahi. 

Connections: BT’s Openreach division may be spun off, and bankers are preparing for a potential bidding war

The Franco-Israeli telecoms tycoon’s company Altice UK took a 12.1 per cent stake in BT in June, worth £2.2billion. 

A six-month period preventing him from launching a takeover under City rules expires on December 11. 

That has fuelled speculation that Drahi may buy more shares and apply pressure on the board to sell a stake or even the whole of Openreach, which owns the infrastructure that connects most UK homes. 

BT has hired boutique investment bank Robey Warshaw, which employs former Chancellor of the Exchequer George Osborne, to fortify its corporate defences. 

The situation has prompted bankers and investors to closely examine BT and Openreach. Barclays and another large investment bank have conducted recent research which values Openreach at about £26billion. That is far higher than the £18billion to £20billion price tag attributed to the division by analysts this spring.

But one senior telecoms source said: ‘The reality is Openreach is worth double that. There’s a bit of a goldrush for telecoms infrastructure assets in Europe. It is definitely undervalued and, if you look at the profit forecasts, it could easily be worth more than £40billion.’ 

Buyout giant KKR has separately launched a €33billion (£28billion) bid for Telecom Italia, with KKR’s rivals CVC and Advent also reported to be interested. 

The source said: ‘That deal shows the top private equity firms think large telecommunication companies are not too big to stomach. All the private equity houses and investment banks are running the numbers on BT and Openreach.’ 

Pressure: Investor Patrick Drahi took a big stake in BT

Pressure: Investor Patrick Drahi took a big stake in BT

Sources said that CVC and Apax could form part of a consortium rather than acting alone. 

Macquarie, an Australian investment bank sometimes known as the ‘Vampire Kangaroo’, owns UK infrastructure assets including Southern Water and East Yorkshire fibre broadband firm KCom. Canada’s Brookfield owns specialist Open Fibre Networks through its UK utilities arm. 

BT, Altice, CVC Brookfield and Macquarie declined to comment. Apax could not be reached.

Drahi has so far presented a cordial picture of relations with BT, publicly supporting chief executive Philip Jansen’s strategy to bring full-fibre broadband to 25million homes by the end of 2026. 

However, Altice has a fearsome reputation for cost-cutting in Europe. The group is currently attempting to sell its Portuguese division, which could fund Drahi’s next move. 

Drahi’s options include retaining or increasing his stake, attempting a full takeover of BT or forcing a partial or full sale of Openreach, handing shareholders a hefty dividend. A full takeover is thought to be unlikely, given the group’s size, pension fund liabilities and potential political hurdles. 

German giant Deutsche Telekom may play a crucial role in supporting or opposing Drahi’s plans. It has repeatedly suggested it may review its 12 per cent stake, and chief executive Tim Hottges said this month he was keeping ‘all options open’. 

Jansen has openly considered the possibility of selling a stake through a joint venture in Openreach to help fund its full-fibre broadband rollout. But he ruled out the idea earlier this month, opting instead to fund the rollout itself. 

BT was privatised in 1984 under Margaret Thatcher’s Government, but huge debts and its large pension deficit have been a drag on its shares. The stock is up 13 per cent so far this year at £1.54 a share, valuing BT at £15.3billion, amid Drahi’s interest and the reinstatement of the dividend. 

The end of Drahi’s lock-up comes at a critical point for BT.

Last week, it completed its move to its new headquarters in Aldgate, London, and former ITV boss Adam Crozier becomes chairman this week. 

It is also considering selling its BT Sport arm. 

Matthew Howett, founder of consultancy Assembly Research, said: ‘This is a pivotal moment in BT’s history – it’s going through a transformation.’ 

But he added: ‘A spin-out is in no way a straightforward process – the Government is taking a keen interest in network assets, and the pension scheme is a can of worms.’

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