Gavin Patterson: If Deutsche Telekom bids for BT after
2019, and if it makes sense, it is something we will consider
It is eight months, more or less, since BT bought UK-based mobile operator EE for £12.5bn from its previous owners, Deutsche Telekom and Orange.
It has been a turbulent year in the UK, with a referendum vote to leave the European Union (EU), and a challenging year for BT, which has been facing calls for it to separate out its last-mile infrastructure company, Openreach, into a fully independent entity.
So what does Gavin Patterson, CEO of BT since September 2013, fear the most when he wakes up in the middle of the night? Perhaps Timotheus Höttges, Deutsche Telekom’s CEO and now on BT’s board as the representative of its largest shareholder, coming into a meeting and saying he wants to mount a takeover bid?
Alternatively, a collapse of the UK economy thanks to the country’s departure from the EU, nicknamed Brexit? Or Sharon White, the CEO of the UK’s regulator, Ofcom, deciding after all that Openreach should be entirely separate from BT?
Deutsche Telekom has to wait until 2019 before it can increase its 12% stake in BT, acquired as part of the EE deal: Orange took just 5%. Patterson affects a lack of concern at the idea that Höttges might turn up at a BT board meeting in early 2019 with an offer for the company. “If it makes sense, it is something we will consider, “It is not an imperative either.”
Many believe that Deutsche Telekom has long harboured a desire to expand into the UK by buying BT. There are people around who say they have personal knowledge that Höttges wants to buy it. However, that’s a question that can be set aside for two and a half years.
Falling share price
However, BT has become a cheaper potential acquisition this year. Look at the numbers: Deutsche Telekom’s shares have stayed relatively stable over the past few months at €15, giving it a market capitalisation of €72bn. Not the case with BT, whose shares have dropped from £0.35 in February, just after the EE deal was completed, to £0.25 now.
That gives BT a market cap of around £52bn, or – thanks to the post-Brexit decline in the value of the pound against the euro – just €60bn. What does Patterson fear about Brexit? “The Brexit situation is an unknown,” he says. “No one’s had a shock to the business.” Since the vote in June 2016 “we have signed a number of major deals for BT Global Services with businesses outside the UK.”
It’s still an open question. The UK government is not expected to tell the EU of its desire to leave until early 2017. Only then can formal negotiations start on the terms and conditions.
“We do not know what we are going to get yet,” says Patterson. However, among his top concerns are “access to markets and talent”, he says. One of the founding principles of the EU is that people can move through the 28 member states to seek employment. That gives any company in the EU a market of 500 million people, of whom nearly 300 million are in the labour force.
Many of the pro-Brexit supporters campaigned against the free movement of people – and some of the former leaders in the campaign are now in government roles that will see them play a prominent role in the negotiations that are to come.
“The battle for talent is a real one and, if we become a less hospitable country, we, the economy and companies, in general, will suffer,” says Patterson.
What about one of those other potential fears, the future of Openreach? In July Ofcom decided that Openreach will become a legally separate company, but will remain within the BT group – not the structural separation that many were calling for, which would have required Openreach to have different shareholders. Work is going on, and Openreach is under more examination than it has been for years.
On this, Patterson is resolute. “Structural separation is the wrong thing,” he declares. “There is no evidence around the world that it will deliver a better service.”
Legally separate Openreach
There have been examples of structural separation in other countries – primarily in Singapore, Australia and New Zealand. “None can be classified as a success,” he says.
But above the structural relationship between BT and Openreach there is a more significant requirement, he says. The “right outcome” would be the formula that meant “we were guaranteed to keep the UK ahead of the scorecard as the main economy in the G20”, he says.
BT “will invest in fixed and wireless” to achieve “as close to 100% coverage as we can on fibre and extend 4G and various versions of 4G”, he adds. “If want national coverage for everybody, an integrated BT is the way to do it.”
The investment required is huge, he points out. “We’re spending £6bn over three years – and no one else is spending anything like that.” Later on during the interview he clarifies that it is “£6bn on fixed and mobile”, of which Openreach is getting £1.4bn.
And Openreach being part of BT is the only way that it could have afforded the investment it has made so far, he says, following a decision in 2009. “The payback period for networks runs into double-digit years. We have a strong balance sheet and we can look at margins for payback upstream and downstream,” he says.
Back into the mobile business
We turn at last to BT’s expensive return to the mobile industry with its purchase of EE. For a decade and a half BT was one of the few incumbent fixed operators in the developed world with no mobile business. It used to own a company called Cellnet, which it renamed O2 and demerged at the end of 2001 as an independent quoted company. Telefónica picked up O2 for £17bn in 2005, much to the delight of its shareholders.
The separation had happened before Patterson joined BT but, in retrospect, wasn’t it a mistaken decision? “It was the only way at the time,” he says. “The shareholders wanted to split the fixed and mobile businesses. It was way of addressing balance sheet issues in 2001 after the first internet crash. If you’d held those shares you’d have done very well.”
It meant that, until EE joined the group this year, BT was able to focus on fixed-line services, aside from dabbling at being a mobile virtual network operator.
“We were able to perform well, particularly between 2009 and 2015,” he says. “The benefits of fibre brought a renaissance of the fixed line. It allowed fixed to have a role again. It was when the fixed-line base stopped going down and started going up again.”
But the EE deal “was a great opportunity to go back into mobile”. This year European Commission blocked an attempt by CK Hutchison to expand its Three UK business by buying O2 UK from Telefónica for £10.25bn. “Don’t assume O2 thing is off the agenda.” Among the issues that were left unresolved was network sharing: O2 UK and Three UK are both involved in different shared networks. “That’s just one of a number of concerns,” he says.
And for BT, “the EE deal is already proving to be a fantastic business. You can see that in our first quarter numbers from a revenue perspective.” BT reported a 0.4% growth in the underlying revenue on a pro forma basis for the quarter ending on 30 June 2016.
Now, “there is a very clear four-year plan to realise significant synergies”, he says. “We only need one human resources system and one financial system to run the business. We have started to integrate the network business – we only need one core. There are savings around IT systems – though the key is that you have to turn stuff off: those are the savings. We are reducing the estate, moving EE’s headquarters to BT Centre, and some BT people are moving to EE offices.”
Customers choose brands
But BT is keeping both brands. As a former European marketing director at Procter & Gamble, with brands from Always and Gillette to Oral B and Wella, Patterson knows about brands. “Customers choose brands and don’t choose networks. It’s the services and the level of service.” The aim is to run brands that “do a very good job for a subset of the market instead of a compromise job for everyone”.
However, the united company has started to cross-promote. “We’ve started to offer BT Sport to EE customers. That is an example of using assets across multiple brands.” BT Sport is the face of the company’s £1bn investment in sports, offered as an incentive to fixed broadband customers.
Why invest in content? “To drive the usage of our network. We want to make sure customers have access to all sorts of content, and provide it to customers as part of a bundle. We can do things like partner with Netflix, which is integrated into our network and the electronic programme guide.”
So far there are just 1.6m TV customers, plus another 3.4m on cable or satellite. Sky, by comparison, has 11m customers in the UK.
That is a long way to go for one of BT’s biggest investments in the past few years.