Shares in BT Group rose dramatically after a report in a UK national newspaper stated that a number of global equity firms have been examining a potential GBP20 billion ($35.1 billion) bid for the former UK incumbent.
A newspaper report has claimed that private equity groups are considering a bid for BT Group.
The article in The Times newspaper pushed shares in BT up 5.65% on the London Stock Exchange. The article cited an unidentified senior telecoms adviser for a venture capital firm as saying his firm had been running a slide rule over BT. However, speaking to Computer Business Review, a BT spokesperson dismissed the article.
There is little doubt that cash-rich private equity funds are seeking cash-generative operations, and on paper BT looks like an attractive proposition. It only has GBP8 billion ($14 billion) of debt, which is low for a European incumbent. Last year it generated annual profit of GBP2.3 billion ($4.3 billion) and revenue of GBP18.6 billion ($34.3 billion). It has a market capitalization of GBP18 billion ($31.57 billion) and a current earnings yield of about 9%, all of which makes it an attractive investment target for equity groups seeking steady returns for their funds.
However, there are significant drawbacks to any potential deal. BT has a workforce that has a strong union presence, and staff are protected by a no-involuntary-redundancy agreement. However, an even bigger hurdle comes in the form of BT’s mammoth pension liability of GBP34 billion ($59.6 billion). The carrier also lacks a mobile operation to drive growth, after it spun off BT Cellnet (now O2 Plc, recently acquired by Telefonica) in 2001.
The Times article nevertheless speculated that venture capitalists could choose to keep BT’s wholesale operation and offload the retail and services units to a European carrier such as France Telecom, Telefonica, or Deutsche Telekom. The article also said that other private-equity firms are also weighing up the company and, given its size, a bid would have to be from a consortium.
A consortium of venture capitalists known as Nordic Telephone Company ApS, or NTC, has already successfully gained control of the Danish incumbent carrier TDC. A group of private equity consortiums are also thought to be looking at Irish carrier Eircom, and UK network operator Kingston Communications (Hull).
However, the general consensus was the BT would be too big a pill to for VCs to swallow.