Acquisition Strengthens BT's Moat
We've upgraded the narrow-moat firm's moat trend to stable from negative.
We are maintaining BT Group’s (BT) narrow moat rating and upgrading its moat trend to stable from negative. Our fair value estimate remains unchanged. We think the acquisition of EE has strengthened BT’s moat due to it being the only operator that owns both fixed-line and wireless telephone networks. As the owner of both networks, it controls the upgrade schedule, so it knows what areas will first be built out with new services, whether that is fiber-to-the-home (FTTH), G.fast, or 5G. It can target first the most competitive locations. It also has full control of marketing, billing, and the ability to cross-sell other services. Other countries that are further along in convergence have seen dramatic declines in churn. We anticipate BT will also reduce churn, which enhances the lifetime value of a customer and allows the operator to reduce marketing and retention spending. As the only operator in the country that owns both networks, we believe BT’s moat is strengthened.
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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Allan C. Nichols does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.