Analysts at Haitong Research have concluded that Openreach, the networks arm of BT Group PLC (LON:BT.A) “cannot be legally separated” from telecoms giant whatever industry regulator Ofcom’s desires.
In a client note published today, the broker’s research team said it believes that whatever Ofcom “chooses to do now on this issue is irrelevant to BT investors.”
Haitong’s analysts drew this conclusion after studying submissions the trustee of the BT Pension Scheme (BTPS) made to Ofcom on October 4, which were published on November 29.
They said the submission showed that “legally separating Openreach would render Openreach Co insolvent. In addition, it would hurt the ability of the rest of BT to stand by the BTPS (BT’s Covenant).”
READ: BT told to separate Openreach
The analysts pointed out that Ofcom has accepted that the scale of extra BTPS costs is the biggest determinant of whether its proposal to legally separate Openreach is viable or not.
As at June 2015, the BTPS had liabilities of £53bn and a £10bn deficit so the pension scheme’s trustee’s position outranks those of all other stakeholders, the analysts said.
They concluded: “Because of this, the Trustee’s categorical position is that Ofcom’s proposal to legally separate Openreach is unviable and thus also a big threat to Britain’s digital economy.
“So even if BT wanted to assent to Ofcom’s wishes, it cannot.”
Haitong repeated a ‘buy’ rating on BT shares, with a fair value price of 560p.
Responding to the research, however, an Ofcom spokesperson said: “Our plans to legally separate Openreach from BT are achievable, proportionate and carefully considered."
"Crucially, they would allow BT to continue to meet all its pension obligations. Our expert advisors have also identified a range of measures to reduce the impact of legal separation on BT’s pension costs. We are now preparing a detailed notification of our plans to the European Commission.”
Regulator's ruling
At the end of last month, Ofcom ordered BT to make Openreach a separate company, although it stopped short of forcing the FTSE 100-listed firm to diverge ownership of the subsidiary completely as most of its rivals had wanted.
Sky PLC (LON:SKY) and Talk Talk Group PLC ((LON:TALK) both use BT’s broadband infrastructure and have been consistent complainants about the service they receive.
The regulator said BT had not addressed the competition concerns it spelt out in July and as a result it wanted Openreach to become a distinct company with a separate board and its own chairman.
-- Adds Ofcom response --