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LONDON (Reuters Breakingviews) - BT’s split will please all parties some of the time. Rivals say the status quo is bad for them and customers, and might have wanted a full breakup. But the UK telco’s huge pension scheme made that impractical.
Friday’s agreement concludes a two-year tussle over the structure of BT’s network business, Openreach. Regulators were concerned that a division which runs most of Britain’s broadband infrastructure was serving BT at the expense of new investment and rivals such as Sky, Vodafone and TalkTalk, which also rely on the network.
The settlement ticks some of regulators’ boxes. Openreach will be incorporated as a separate legal entity with its own chairman, chief executive, and a majority of non-BT board members. It will have control over spending decisions – although the parent will set the size of its budget – and must formally consult with BT’s rivals about large investments. Some reforms, such as giving Openreach its own “distinct branding”, are cosmetic. But the agreement separates the division as much as possible from BT without the latter losing control of earnings or deconsolidating assets.
A successful Openreach would benefit the group as a whole, so there’s no reason for BT to under-invest drastically. But the parent group could hold back network upgrades if it thinks cash might be better spent elsewhere. The division’s return on investment might fall if the new management makes decisions that benefit rivals. And it’s still ultimately up to BT to decide how much will be invested in costly full-fibre broadband.
That might have tipped the balance in favour of a full separation, were it not for BT’s pension scheme. This is in deficit to the tune of 7.9 billion pounds, according to the last official assessment, which probably understates the shortfall. Without Openreach’s assets, the scheme’s trustees would probably demand higher payments from BT. Bernstein analysts estimate that could have cost BT as much as 1.5 billion pounds, enough to bring full-fibre connections to about 2 million homes.
A clean break would therefore have partly exacerbated the problem it was meant to solve. While far from perfect, the fudge is preferable.
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