Market Insight

BT finally agrees to ‘divorce’ Openreach

March 10, 2017

Alzbeta Fellenbaum Alzbeta Fellenbaum Manager – Research and Analysis, Service Providers & Platforms

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After months of discussions, negotiations and various other ramifications, BT has finally agreed to a legal separation from Openreach – its soon to be former wholesale infrastructure division. The move follows a two year stalemate between BT and Ofcom, the UK regulator, who has argued that the forthcoming separation will help encourage competition and speed up the roll-out of superfast broadband in the UK.

As part of the separation process, Openreach will be the direct employer of 32,000 existing staff. To protect these employees the UK government will extend its Crown Guarantee which underwrites BT’s £47 billion pension fund. Under the terms of the existing agreement, the UK government will step in financially in the unlikely event that BT declares bankruptcy.

The new company will also have its own board and the power to make financial decisions. All BT branding will be removed - which will facilitate the formation of the new company’s own identity and culture. Openreach chief executive Clive Selley will report directly to Mike McTighe, Openreach’s chairman, whose appointment was announced in late November 2016. However, according to BT chief executive Gavin Patterson, the BT board will set Openreach’s annual budget as the ‘100% shareholder’. In addition, BT will have first refusal on the appointment of future Openreach chief executives, but this must follow approval by Ofcom.

Ofcom, according to its head Sharon White, will be closely monitoring Openreach’s progress post-separation, and as expected, BT’s competitors have welcomed the announcement with open arms. Openreach will have an obligation to consult with its customers including Sky, TalkTalk and Vodafone regarding future network expansion and investment. There will also be a ‘confidential phase’ during which customers will be free to discuss ideas without fear of these being disclosed to BT.

Our analysis

While on the surface it looks like the BT Group as we know it will soon be a dim distant memory, a closer inspection tells a slightly different story. True separation involves much more than the removal of branding, and the worry is that the harshest of critics may complain that although the new company will be able to make its own investment decisions, it will not have control over its annual budget. BT chief executive Gavin Patterson has argued in the past that a complete break up will weaken ‘cash flow access’ for Openreach’s 32,000 workers currently in the BT pension fund (the fund has 360,000 members in total).

Arguably, the most important immediate hurdle to overcome will be the future security of Openreach’s staff. BT reported a £9.9 billion pension deficit back in June 2015, which was aggravated further by Brexit in the short to medium term. However, since then BT has been working hard to repay the pension fund, and the announcement that the UK government will extend its Crown Guarantee will come as welcome news.

The key issue here is time. The Communication Workers union will not give the separation its blessing unless the pension scheme is fully protected, and the extension of the Crown Guarantee will require the enactment of new government legislation. The union also added that they will be taking steps to ensure the full protection of its workers’ terms and conditions and job security, and with that in mind careful negotiations will be imminent.

Once the separation is finally complete, Openreach will be free to continue with the UK government’s plans for network expansion as outlined by Philip Hammond MP, Chancellor of the Exchequer, during his first Budget speech last week. Starting in 2017, Hammond announced a £200 million investment in local projects to test the delivery of fibre broadband networks. This will include the availability of fibre broadband ‘vouchers’ for businesses and the all-important opening up of public sector assets, including existing ducts, which should allow for fibre to be laid more cheaply. The future independent status of Openreach and the government’s investment plans will open up new and exciting possibilities for BT’s competitors.

 

Geography
UK
Organization
BT Group BT Openreach
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