Britain’s two public telecoms giants are seeking to convince investors they are transforming into fresh beasts able to capitalise on the digital revolution in a way they have struggled to do over the past decade.
Philip Jansen, BT’s chief executive, told investors that “yes, it’s painful now” — referring to the company’s high expenditure on infrastructure upgrades and successive quarters of falling cash reserves. But, he argued, the former monopoly is now a “totally different company” that is “positioned for future growth and can take advantage of new opportunities”.
Earlier this month, BT and Vodafone, Britain’s second-largest telecoms operator, announced major restructuring plans, including about 60,000 job cuts across the two groups over the next few years.
BT said it would reduce its headcount by up to 42 per cent by the end of the decade as its fibre build draws to a close and thousands of jobs become automated, while Vodafone said it would slash roughly 12 per cent of its global workforce over the next three years by simplifying its operations.
“It’s not a happy ship at the moment,” said a branch manager of the Communication Workers Union, which represents employees at BT. “There’s a lot of discontent out there.”
Both made the job cuts announcements as they reported results that disappointed the market, most notably falling short on the most-prized metric by the City for telecoms stocks: free cash flow. Their results came off the back of successive quarters of high capital expenditure coupled with weak revenue and earnings growth, which has precipitated a 20 per cent slide in BT’s shares over the past two years, and a nearly 40 per cent drop in Vodafone’s.
“What can you give investors . . . that would reassure them that this isn’t classic telco spending more to prop up a sinking ship?” Goldman Sachs analyst Andrew Lee asked during BT’s investor call.
Over the same period of lacklustre growth, foreign private investors have swooped in to take stakes in these unloved British assets. United Arab Emirates telecoms and investment group e& has built a 14.6 per cent stake in Vodafone, alongside French telecoms tycoon Xavier Niel, and “cable cowboy” John Malone’s Liberty Global, who between them own more than a fifth of the company. Meanwhile, Franco-Israeli billionaire Patrick Drahi has upped his stake in BT to nearly a quarter.
Where institutional investors are still seeking short-term improvements to key metrics, these private equity-style investors come equipped with much longer time horizons for returns and strategic visions that go beyond annual dividends — even if some of their goals are shrouded in mystery.
“Given decades of evidence of value destruction, public markets are understandably quite cynical,” said Carl Murdock-Smith, an analyst at Berenberg. “When you’re doing large long-term infrastructure investments, it kind of raises the question: are public markets the right place for telecoms groups?”
To Goldman Sachs’ Lee, private investors in British telecoms groups are able to survey the landscape and see “monumental changes taking place”.
Among them, he pointed to regulators’ willingness to tolerate significant price rises for fixed and mobile contracts, tax breaks offered by the current Conservative government to facilitate huge investments in infrastructure, and what some see as an apparent softening in the stance on potential consolidation in the market.
One top-10 BT investor noted the FTSE 100 group “divides opinion”. “You’ve got the whole range from haters, to massive fans. [Drahi’s] a massive fan.”
“I do think there’s a reasonably good case for long-term value,” they said, pointing to the company’s huge investment in deployment of full fibre which should stand it in good stead to attract and retain customers, as well as make improved returns over the next decade. “When it’s all done and dusted it could be a good asset.”
Still, while all of these private investors are proving benign benefactors for now, their presence is no doubt a source of pressure. Drahi, Niel and Malone made names for themselves as ruthless businessmen, willing to slash and burn in their efforts to grow companies.
BT and Vodafone have sought to present a vision of their future incarnations as leaner businesses with much lower costs — a relatively attractive proposition to a range of investors.
Telecoms groups have historically spent a higher proportion of their operational expenditure on staff than almost all other major sectors, apart from technology and healthcare, according to analysis done by Goldman Sachs.
Where tech and healthcare companies’ staff costs are driven up by high salaries, telecoms groups tend to have more lower-paid staff in roles such as customer service, shop-floor sales and call centres, a good portion of whom are in jobs that could be automated, according to Lee.
Although BT’s big ticket announcement of up to 55,000 worker reductions by the end of the decade garnered a lot of attention, Jansen told investors the company had already been cutting about 5,000 jobs a year, partly through automation.
While BT and Vodafone were the only major European telecoms groups to announce major job cuts and restructuring this year, peers across the continent have made similar announcements in recent years, including Germany’s Deutsche Telekom in 2018 and Spain’s Telefónica in 2021.
And few see promises about headcount reduction as the salvo for Britain’s two biggest telecoms groups, which face distinct, entrenched problems that have caused them to fare worse on public markets than most of their counterparts in mainland Europe.
The BT union representative pushed back against the argument that management needs to slash its workforce to improve returns, arguing that “with the explosion of broadband and the internet there is certainly enough money there to make good profits”.
BT, the former monopoly, is subject to strict and sometimes changing regulatory pressures. Its attempt to lower prices for wholesale broadband customers including Sky and TalkTalk was scrutinised and delayed by Ofcom, causing the share price to dip earlier this year.
Meanwhile, the Labour party has signalled that if it were to win the next election, it might seek to limit or even reverse above-inflation price rises implemented by the biggest operators during a cost of living crisis.
Both BT and Vodafone are operating in the UK, which has a highly competitive mobile market, comprising four players that compete intensely on price, and it is far from clear that the competition authority will allow a merger between two of these companies.
A lot of Vodafone’s problems — conceded by its new chief executive Margherita Della Valle — stem from two key difficulties. The first is that the business is complex, spanning various jurisdictions from the Democratic Republic of Congo to Romania. The second is that several of its most important markets — the UK, Spain and Italy — have four or more telecoms operators competing on price, making it very difficult to improve returns.
Della Valle is trying to finalise a deal to combine Vodafone’s UK business with CK Hutchison’s Three UK, although negotiations have been painstakingly slow. The group has also been vocal about ambitions to pursue deals in Spain and Italy.
Against this backdrop, the jury of analysts and investors remains out as to how transformational investments and cost-cutting at Vodafone and BT will be.
“Asking investors to bear with you while you invest is fine, if you have a record of creating value,” said Murdock-Smith of Berenberg. “In truth, it’s really hard to know what the long-term future is. Investors struggle to gain comfort with that.”
