BT has of course long been at loggerheads with regulator Ofcom over the future of the division, with the company’s many rivals calling for a complete separation of its highly-lucrative infrastructure operations on competition grounds.

The telecoms play has avoided an imminent catastrophe after agreeing “a long-term regulatory settlement that will see Openreach become a distinct, legally separate company with its own board,” but which will remain part of the broader BT entity. The deal will see 32,000 BT employees and their pension arrangements transferred over to the new company.

The deal has also put to the sword fears of a long and protracted battle, particularly after Ofcom had earlier vowed to take the saga to European lawmakers to resolve. Indeed, the regulator has commented that the move avoids “the delays and disruption… associated with structural separation or the sell-off of Openreach to new shareholders.”

Temporary relief?

Broker UBS viewed the deal as a positive “in terms of removing a notable overhang, an absence of negative surprises and avoiding a prolonged period of uncertainty had Ofcom taken its case to the European Commission.”

But the bank believes the move could prove no more than a temporary sticking plaster, warning that “we see a risk that over the longer-term, Openreach could push to assert its independence, and legal separation is one step away from structural separation.”

And while BT’s update did not contain any news on capital expenditure or fibre rollout plans, UBS expects the City’s cost forecasts to move higher following Friday’s accord.

UBS believes BT may now speed up the rollout of fibre to the final 5% of British homes, as well as extending so-called fibre to the home (or FTTH) “depending on the outcome of the pending Wholesale Local Access (WLA) review that will determine whether there should be regulated pricing for fibre.”

Still packed with uncertainty

There are clearly still a lot of questions concerning BT and Openreach’s relationship that could have a devastating effect on the telecoms provider’s earnings growth in the near-term and beyond.

But of course, Openreach is not the only problem BT has to deal with. As well as facing rising costs to hang onto its infrastructure arm, the London company is also preparing to address its massive pension liabilities. The next state-of-play report is due for release during the summer.

Meanwhile, the group-wide accounting investigation prompted by the scandal at BT Italy could significantly amplify concerns over the strength of the company’s balance sheet. The size of the hole at its Italian operations alone has more than trebled from an initial November estimate and, as of March, stood at an eye-watering £530m.

There is clearly potential for plenty of bad news to seep coming out of BT in the months ahead, and to consequently drag the share price down to fresh multi-year lows. I believe risk-averse investors should keep giving the telecoms play a wide berth for the time being.

The post Should you buy BT Group plc following the Openreach deal? appeared first on The Twelfth Magpie.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

News of a massive accounting scandal at its BT Italia division has grabbed the headlines, the news shaving £8bn off the telecoms giant’s share price and sending the stock to its cheapest since the summer of 2013. But this isn’t the only problem on BT’s plate.

Accounting woe

However, let’s start by discussing the troubles at the company’s continental division, especially as speculation mounts that BT may not have a clue concerning the full scale of the accounting scandal.

The business first flagged up the problem back in October when it warned an “initial investigation into inappropriate management behaviour” revealed a £145m black hole on the balance sheet. Three months later and this figure has morphed into a quite-staggering £530m.

The fault is anticipated to smack adjusted revenues and EBITDA by £200m and £175m respectively in both fiscal 2017 and 2018, while net cash is predicted to take a £500m hit this year alone.

And this may not be the end of the story as BT now embarks on a group-wide assessment of its financial processes, systems and controls. This is a move that could reveal even more problems.

Pension problem

The sizeable whack for BT’s balance sheet is an added issue as the business deals with its gargantuan pension liabilities.

Industry experts have valued BT’s pension deficit at between £9bn and £10bn, although an accurate picture of the shortfall will become clearer when the business conducts a formal review in June. Investors need to be on guard as rising retirement-related costs could have a crushing effect on BT’s ability to keep dividends growing year after year.

Market turbulence

BT’s precarious financial health is also a problem as the business draws swords with Sky, with both companies locked in an expensive arms race to furnish their television platforms with the cream of the sporting world.

For the time being these measures are helping revenues at BT’s Consumer division to keep marching higher. But BT still faces top line turmoil elsewhere, the company announcing this month that it faces a “more challenging outlook in the UK public sector and international corporate markets.”

Broadband bother

Meanwhile, BT’s fight with Ofcom over the future of Openreach adds another layer of uncertainty to the firm’s long-term profits outlook.

The company tried to curry favour with the regulator this week by announcing that Sir Brendan Barber and Edward Astle would be appointed to the board of its infrastructure arm.

But Ofcom has poured cold water on the news, and advised that “these changes fall short of our requirements for a legally separate Openreach that delivers for all of its customers.” The body added that “we intend to take our plans to the European Commission this year.”

These pressures are likely to cause BT to keep raising the amount it invests in the UK communications network. Having said that, any measures the firm takes to placate the regulator are unlikely to silence calls by the company’s rivals for Openreach to be fully hived off completely.

The post 4 big questions hanging over BT Group plc appeared first on The Twelfth Magpie.

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• Why has the BT share price almost doubled – yet gone nowhere?
• Down 16% in 5 weeks, are BT shares just too good to miss?
• Down 16% to around £2.03! Here’s where BT’s bargain-basement shares ‘should’ be trading right now
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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

I reckon the company may not beat the market over the next decade or so, however, due to some other underlying issues in the business that could hamper performance.

A Competitive and Expensive Commodity

A lot of the services offered by BT are becoming commoditised, meaning there are often offerings of equal quality and value available to consumers elsewhere. A quick visit to moneysupermarket.com reveals a number of viable options for Internet or TV services. This intense competition is unlikely to dissipate in my view and could result in a “race to the bottom” on prices.  

In recent years, BT has turned to buying sports TV rights to gain an advantage over competitors like Sky. BT paid a whopping £960m for three years of Premier League TV rights, which equates to around £7.6m per game, and another £897m for exclusive Champions League and Europa League rights. There is no guarantee that BT will win the next bidding war, which could see the appeal of their broadband and TV offerings significantly reduce for a number of customers.

On top of that, another one of BT’s key competitive advantages is currently facing some uncertainty. Openreach, which is a part of BT Group, develops and maintains the countries main telecoms network, which is used by providers like Sky, TalkTalk and Vodafone. BT has been accused of running Openreach in a biased fashion, favouring its own operations.

Pension Payments and Cash Flow

Competitors want Openreach to be spun-off into a completely separate entity. This looks pretty unlikely, but Openreach is the company’s biggest source of cash-flow and any complications here could put pressure on the payments to cover its £10bn pension deficit. BT also faces accusations of under-investing in our country’s infrastructure. Only 2% of premises have access to fast fibre connections — the remainder are stuck on old-fashioned copper connections.

It seems likely that Openreach will be forced to increase capital expenditure above and beyond the £6bn planned over the next three years. This, combined with the aforementioned £530m write-off, potentially increased pension payments, and increasing competition, could place pressure on free-cash-flow and thus the dividend.

There’s also a significant debt-pile alongside the pension deficit for the company to worry about. If cash-flow is seriously crimped by the above factors the company would have to either cut the dividend or take on more debt to pay it, which could dent its credit rating, thus increasing the costs of financing its £10.9bn net-debt pile.

BT is one of the world’s premier telecommunications companies and has an enviable competitive position in a number of its businesses. That said, there’s too much uncertainty hanging over the balance sheet and the sustainability of these advantages for me to consider buying the shares.

The post 3 problems BT Group plc has that are bigger than fraud appeared first on The Twelfth Magpie.

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Zach Coffell has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.