BT share price: Company plans to merge Openreach and Wholesale

on Nov 14, 2014
Listen, Friday, November 14: BT Group Plc (LON:BT.A) is planning to shed its wholesale division and fold the business into its infrastructure division, according to a report in The Telegraph.

The newspaper reported yesterday that the telecoms giant had applied to the industry regulator Ofcom for permission for BT Wholesale to be absorbed into Openreach. If approved, the move would make the infrastructure division BT’s largest business and would boost the company’s cost saving programme. However, it may also intensify concerns in the industry that the unit has too much power.
In today’s trading, BT shares were 0.4 percent higher at 370.30p, shortly after the opening bell in London. The company’s stock has fallen 2.8 percent since the start of the year.
*h*Cost savings*h*
An internal merger between Openreach and the wholesale division would bring significant benefits for BT, mainly in terms of cost savings, as the two units sell some of the same services to other telecoms companies.
The Telegraph quoted James Barford, head of telecoms research at Enders Analysis, as observing: “BT Wholesale and Openreach sell some of the same products to third parties as well as trading an enormous amount with each other, and so it would presumably allow BT to take out some overheads, and some more substantial cost savings in terms of process simplification as well.”

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BT Wholesale has also been in decline in recent years, due to price controls imposed by Ofcom and technology shifts in the broadband market that means BT’s rivals rely more on Openreach. Also, more households in the UK are shifting to superfast fibre broadband, sold mostly by the infrastructure unit. Last year, the wholesale unit reported £2.4 billion in revenue, compared with £4 billion, three years earlier.

*h*Unfair advantage?*h*
The move might prompt concerns for BT’s broadband competitors, who could view the merger as giving an unfair advantage to the telecoms giant. Openreach is subject to regulations designed to keep it separate from BT, so that competitors can use the company’s network on equal terms. Absorbing the wholesale unit into Openreach would make the infrastructure unit a competitor to some of its customers. Still, the move might actually bring some benefits to BT’s larger customers, who would not have to deal with two BT divisions as they currently do.

Barford suggested that the main concern for BT’s rivals “would probably be that the merger might make it easier for BT to wholesale bundles of services at a loss with regard to regulated input prices but then recoup its margin via Openreach”.
A spokesman for BT told the Telegraph that the company was “always looking at ways in which we can better meet the needs of our customers and reflect market changes”. The spokesman added that it was examining how to better serve “wholesale Communications Provider customers currently addressed by Openreach and BT Wholesale”.
*h*Analysts on BT*h*
According to the Financial Times, the 20 analysts offering 12 month price targets for BT have a median target of 455.00p, with a high estimate of 600.00p and a low estimate of 245.00p. As of November 08, 2014, the consensus forecast amongst 39 polled investment analysts covering BT has it that the company will outperform the market. The same consensus estimate has been maintained since the sentiment of investment analysts improved on November 05, 2013, the FT notes.
**As of 08:55UTC buy BT shares at 369.10p**
**As of 08:55 UTC sell BT shares at 368.90p**


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