Pick up the Phone or Let it Ring?: BT’s board prepares to defend against potential hostile takeovers

September 28, 2020

3 min read

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What's going on here?

The telecoms giant British Telecom (BT) is preparing to defend itself against hostile takeovers from market competitors and private equity firms after its share price plunged by 48% this year.

What does this mean?

In the years prior to the COVID-19 pandemic, BT had already been facing adversity on multiple fronts. Accounting fraud in BT’s Italian subsidiary, a large pension deficit, and increasingly fierce international competition from other telecoms and entertainment companies rivalling BT’s market share by introducing more attractive products and services, had all resulted in financial and reputational damage. The COVID-19-induced lockdown has led to the cancellation of major sporting events, curtailing demand for BT’s sports channels and leading BT to issue refunds to existing customers. Triggered by BT board’s decision to suspend dividends for the first time in the company’s history and issue profit warnings for the next financial quarters, BT’s share price fell to as low as 98p in August this year. Investors have been eyeing a potential takeover bid looking to capitalise on the reduced share price, with telecom firm Deutsche Telekom and US private equity firm KKR being amongst those most likely to make a move. In an attempt to defend itself, BT has hired Goldman Sachs to draw up a defence strategy against any hostile takeover approaches.

What's the big picture effect?

The potential takeover of BT appears to be in line with a resurgence in global M&A activity. In the past 6 weeks, 8 deals with a combined worth of more than $10bn have been announced. COVID-19’s economic impact has resulted in short-term swings of market valuation and a wave of businesses trading at depressed valuations. The current market conditions are attracting opportunistic investors with deep pockets who are seeking to generate a high return on their investment.

Generally, takeovers can create a variety of advantages and disadvantages. When a company is acquired by another company already active within the same sector, this may lead to the increased market power of the acquiring company as it increases the company’s market share. This also reduces the competitor base. When the acquiring company is not active within the same sector or geographic market as the target company, this allows the acquiring company to diversify their risks. Notably, during the current climate, where some sectors are harder hit than others, a company with a diverse portfolio will be in a better position to weather the storm than others. Additionally, a takeover would facilitate changes to the target company’s management who may implement a new corporate strategy that would enable the company to adapt more efficiently to changing business environments.

On the other hand, takeovers, particularly hostile ones, can lead to aggressive foreign attempts to acquire strategic assets and dominate sectors of the economy, which in turn raises national security concerns. BT plays a vital role in the UK’s largest broadband network and the development of the 5G network throughout the country. This subject is delicate in nature as recently seen in the UK government’s ban of Huawei from its 5G network due to fears of foreign governments spying (to see our article on that, click here). As a result, any attempted takeover of BT would face increased regulatory scrutiny, and there is a risk that the UK government blocks the deal or imposes legally binding commitments that are conditional to the takeover being approved. Particularly given the wave of protectionism that is sweeping Europe, we are unlikely to see any bold movements by foreign firms accepted by the UK government.

Report written by Alexandra Hilberer

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