Undervalued BT bolsters defence as potential takeover attempt looms

BT’s share prices have taken a nose dive this year, plummeting 48% to just 101.8p at the end of last week. As a result, the company is more vulnerable than ever to a potential take over, leading the ex-incumbent operator to ask Goldman Sachs to update its defence strategy against such a bid, according to reports.

 

The past few years have clearly been a difficult time for BT, producing disappointing financial results and, more recently, leading the operator to not pay its final dividend of 2019–2020, with no plans to pay one this year either. The situation has only been exacerbated by the coronavirus pandemic’s economic impact, as well as the UK’s decision to remove Huawei from its networks, which will reportedly cost BT around £500 million.

 

As a result, share prices have dipped to their lowest level in more than a decade, leaving BT’s market capitalisation at an estimated £10 billion and the operator looking uncharacteristically vulnerable.

 

However, while a takeover of BT might initially seem very appealing, there are some less attractive factors that need to be considered too. For starters, the operator is around £18 billion in debt, as well as having enormous pension liabilities and government commitments, including a £12 billion investment programme to roll out superfast broadband by 2030. 

 

BT said over the weekend that it has not yet been approached by any potential buyers, hence speculation is rife as to whether the operator is simply doing its due diligence or somebody has it spooked. 

 

“Deutsche Telekom is seen as a likely candidate given its 12% stake in BT following the deal several years ago for EE mobile network,” explained Helal Miah, Investment Research Analyst at The Share Centre. “This speculation in some ways justifies current investor’s belief that the company [BT] is undervalued but its current organisational structure suggests the share price will not appreciate to fair valuation anytime soon.”

 

Somewhat ironically, the news of BT’s preparations to defend itself against a potential takeover have actually bolstered its share prices by around 5%.

 

While the telecoms industry on the whole has demonstrated remarkable resilience to the economic impacts of coronavirus pandemic during its early stages, the amount of financial damage the crisis has wrought is becoming ever more apparent. Major companies previously viewed as untouchable are beginning to expose crinks in their armour, creating opportunities for enterprising investors. In the coming months, BT will likely not be alone in moving to shore up its defences, but how effective these measures ultimately prove remains to be seen.