DT's Biggest BT Bother: Break-Up, Not Brexit

Deutsche Telekom has played down recent speculation that it might sell its 12% stake in BT but acknowledged it has serious concerns about the UK fixed-line incumbent, including the risk that it gets broken up. (See Why Deutsche Telekom Might Brexit Too.)

The German incumbent acquired that stake earlier this year when BT Group plc (NYSE: BT; London: BTA) bought its 50% share of EE , a UK mobile operator, along with the half owned by France's Orange (NYSE: FTE). But Deutsche Telekom was recently said to be considering a sale due to concern about the economic impact on the UK of an exit from the European Union (EU), which voters backed in a referendum in June.

So-called "Brexit," however, is not Deutsche Telekom's main worry. During an earnings call with analysts last week, Timotheus Höttges, the German operator's CEO, said the "most concerning" issue regarding BT was the possibility that regulatory authorities could eventually carve it up into separate retail and network businesses. This "structural separation" would obviously have repercussions for all of BT's investors, of which Deutsche Telekom AG (NYSE: DT) is now the largest.

Structural separation is a real threat to BT. Several of the telco's national rivals have been calling boisterously for it, arguing the move would spur investment and improve competition. As an independent company, the networks business would have no incentive to favor BT over its retail rivals and could attract funding from other players, they say. BT, predictably enough, denies discriminating against competitors and insists that its break-up would hinder spending, not boost it. Ofcom , the UK's national regulatory authority, has so far stopped short of such a radical step, preferring to squeeze BT more gently. It has made clear, however, that structural separation is in its armory, and could be used if BT proves recalcitrant in future.

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This has not silenced BT's critics, though. If anything, Ofcom's conservatism on the matter has inflamed advocates of structural separation. Should it find itself at loggerheads with BT in the months ahead, Ofcom could decide to refer the dispute to the European Commission (EC). And if European authorities backed separation, they would set a precedent for the treatment of other fixed-line incumbents in the region. For Deutsche Telekom, that might be even more troubling than the impact on its investment in BT.

Publicly, Deutsche Telekom insists it is not giving much thought to the EC angle. "It is very difficult for us to take a view on how the European Commission would assess Ofcom proposals, and this is not, at this point, I think a situation that we are looking at," said Höttges during the earnings call with analysts last week (see this Seeking Alpha webpage for a full transcript).

Deutsche Telekom also remains optimistic that Ofcom will continue to view structural separation with skepticism. "I think Ofcom will also understand that a structured separation of BT Openreach [BT's networks business] makes no sense," said Höttges. "Let's worry about that when we get there. And I don't think there is much reason why we should think that we should be getting there."

Next page: A German split

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