Monday, May 17, 2021

BT’s ‘fair bet’ deal for full-fibre broadband looks like a winner | Telecommunications industry

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The duo at the top of BT, chief executive Philip Jansen and chairman Jan du Plessis, should be able to put aside their quarrels and agree on this point: the company has secured decent terms from Ofcom for the rollout of full-fibre broadband.

The “fair bet” for BT, meaning the chance to keep excess profits if the £12bn programme goes swimmingly, has been a long time arriving. Jansen’s predecessor was at loggerheads with Ofcom for years. With hindsight, the key to the breakthrough was probably the cut in BT dividend under the new regime. A bit of upfront pain for shareholders made the idea of long-term rewards from broadband dominance more acceptable.

The critical element in the definition of “fair” is the concession from Ofcom that it expects not to cap full-fibre prices for at least 10 years. That may feel like an age but, if it’s correct that payback on fibre investment could take 18 or 19 years, some degree of long-term visibility was probably necessary to inject urgency into BT’s rollout, plus those of Virgin Media, CityFibre and few others.

It is true, as TalkTalk grumbled, that wholesale prices will now rise with inflation on current part-fibre, part-copper lines, after years of falling regulated prices. That, though, feels like the price one has to pay for an upgrade that is overdue by many years.

It has been a good week for BT. Like its rivals, it paid less than expected for 5G spectrum in the latest auction. Now the broadband picture is clear. With more certainty around, there may be a temptation to revisit the idea of selling a minority stake in Openreach, the broadband division, in the hope of booting the share price back to levels seen before the dividend cut.

One hopes Jansen resists. First, the deficit in the pension fund – £9bn at the last count – would be a time-consuming complication. Second, BT now has every incentive it needs to “build like fury,” in Jansen’s words. Keep the structure simple and let the share price take care of itself.

National Grid’s power grab in the UK is a positive sign

If you’ve been following John Pettigrew’s grievances against Ofgem, you might think the UK is the last place the chief executive of National Grid would choose to spend £7.8bn on a regulated electricity business. The company, after all, is in the vanguard of the industry’s rebellion against the energy regulator’s latest five-year price regime. The competition watchdog has been summoned to take a look.

Yet here’s National Grid splashing the mighty sum to buy Western Power Distribution, which supplies almost 8 million customers in the UK. The deal is a marriage of a high-voltage transmission business, the core of National Grid, and the largest of the regional networks that deliver the juice to premises at lower voltages.

The “strategic pivot”, as Pettigrew put it, towards electricity in the UK portfolio seems logical. Electricity is growing faster than gas in the age of electrification and net zero. Thus it becomes easier to expand the asset base and power the dividend in line with inflation. To complete the pivot, National Grid will sell a majority stake in its large UK gas transmission business; it has also agreed the $3.8bn (£2.5bn) disposal of a power company in Rhode Island in the US.

The deal-making logic, though, ultimately rests on the idea that UK ain’t such a bad place for owners of utility monopolies. Don’t expect the grumbling to cease, but National Grid would not be spending £7.8bn unless it was basically happy with its UK regulatory lot.

Ocado delivers a rising share price. But why?

The cheery view of Ocado’s share price is that it has improved by two-thirds, from about £12 to about £20, during a year of lockdown and a boom in online grocery deliveries. Alternatively, one could observe that it’s fallen by slightly more than a quarter from a peak of £28 at the start of last month.

Don’t bother examining Thursday’s quarterly trading update for clues for why the shares have slipped. The trading numbers were as expected: sales up 40%. Rather, Ocado’s shares blow around with the technology breezes. Last year’s big tech whoosh has been followed by this year’s mini retreat into “value” stocks as investors fret about inflation, among other factors.

It makes some sense for Ocado to be viewed more like Tesla than Tesco – the bulk of the company’s value can be attributed to tech deals with overseas supermarkets. Yet, at another level, the extreme volatility is odd. The outlook for Ocado, as a business, hasn’t changed in the past six months.

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