Acquisition Strengthens BT's Moat

We are maintaining

Our negative trend was primarily due to problems at BT's global services division. However, the acquisition of EE and continued declines at the global services division have reduced its impact. This division’s revenue has declined from about 40% of external sales in fiscal 2009 to about 21% in fiscal 2018. It hasn't earned a respectable return on invested capital for some time, and we don't expect it to during the next couple of years, either, but it has intentionally lost a lot of low margin revenue. We anticipate revenue and margins to become more stable and ROICs to slowly improve.

While BT has gained broadband share for the past several years, CityFibre has built out a fiber network in a few cities and has signed an agreement with Vodafone to pass 1 million homes with FTTH by 2021 with an option to go to 5 million homes by 2025. This new network could reverse BT’s broadband subscriber growth trend. However, we are skeptical that CityFibre can generate a fair return on capital with this business.

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