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Morningstar | BT Begins to Aggressively Roll out Fibre to the Premises

When BT acquired EE, it became the only truly convergent telecom operator in the United Kingdom with the ability to offer fixed-line and wireless telephony, broadband, and pay TV on its own network. The U.K. has trailed several other European countries in moving to converged services, but we think this acquisition jump-starts that move. BT should benefit, as it controls the whole network, while others will need to wholesale at least some services from somewhere else. BT's best-performing division has been its consumer sector, and the addition of EE helps this business even further. The firm's investment in fibre should eventually provide growth in the Openreach division. Fibre to the curb is now available to over 25 million premises in the U.K., with G.Fast and fibre to the premise, or FTTP, passing an additional 2 million. We are pleased that BT is finally getting serious about building FTTP and has announced plans to pass 3 million premises by 2020 and if conditions are right 10 million by 2025. BT has 4.1 million retail subscribers and 1.8 million wholesale customers. The firm has also won 44 regional bids in the Broadband Delivery U.K. project. While this should provide some revenue growth, we project that it will be at lower margins than the Openreach division's other revenue.We haven’t been as enthusiastic regarding BT's other venture of taking on Sky in television by launching its own sports channels. The firm has spent or has contract commitments to spend about GBP 2 billion ($2.5 billion) on content and launch costs. While the business won the exclusive rights to the UEFA Champions League and UEFA Europa League and now has more than 3 million direct customers (5 million including wholesale), Sky continues to add broadband customers. We are pleased that the firm is now charging its lower-tier broadband customers for access to its sports channels. Elsewhere, BT's global services division and the U.K. public sector are struggling, negating growth in the retail division, but in the longer term, we expect the global services division to return to revenue growth. However, the U.K. public sector and an accounting scandal in Italy are also pressuring margins.