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Strategic Moves Strengthen the Competitive Upsides of This Communications Colossus

March 25, 2014 | About:

With an extensive footprint in more than 170 countries across Europe, Middle East, Africa, Americas and Asia Pacific., BT Group PLC (BT) is one of the world’s leading providers of communications services and solutions. Further, it is the incumbent phone operator and largest supplier of fixed-line phone services in Britain, boasting a 42% market share. In fact, its telephone network is the only one that reaches the entire population of the U.K. followed by Virgin Media Inc. (VMED), which covers roughly 60%. In addition, the company offers broadband, mobile and TV products and services as well as managed networked IT services.

Lines of Business

BT operates through four lines of business: (1) BT Global Services provides managed networked IT services in over 170 countries around the globe, (2) BT Retail provides communications services to the consumer market and IT and communications services to small and medium sized companies, (3) BT Wholesale supplies products and services to roughly 1,000 communications providers in the UK and (4) Openreach is responsible for the last mile of the UK access network and is engaged in the roll out of super fast broadband.

A Leading Position

Despite the UK is one of the most competitive telephone markets in the world, BT’s nationwide network has enabled the firm to have a lock on revenues stemming from the 40% of the market which is not reached by any other network competitor. Moreover, although local loop unbundling covers 85% of the population, rivals which have put their own equipments in BT’s exchanges still need the company for “the last mile.” Hence, its core infrastructure makes the firm’s participation in the business necessary while significant switching costs contribute to support its market share.

In addition, BT has won every auction for the extension of fiber into UK’s rural areas. Thus, although margins from business in these areas will be lower, the company avoids the risk of other operators building a competing network.

Boosting Its TV Sports Offering

In late February, BT purchased ESPN’s UK and Irish TV channels, thereby enlarging its pay TV offering, BT Vision. These purchases add to its last years’ acquisition of UK exclusive broadcasting rights to 38 live Premier League soccer matches a year from 2013 to 2016 for £738 million ($1.11 billion). These moves have empowered the firm’s competitive position in sports contents offering, while eroding British Sky Broadcasting Group PLC (BSYBY)’s financial success, built on the owning of U.K. broadcasting rights to the Premier League.

Valuation

BT’s stocks trade at 15.50 its trailing earnings, a discount price compared to the industry median of 16.60. Its earnings per share, in turn, showcased an encouraging growth of 24.40% against its rivals’ lean 1%. As for dividend, it delivered a growth of 36.80% on a three-year-average basis compared to its peers’ 2.30% and the company plans to further increase it by 10%-15% in each of the next two years.

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Despite revenue declines, BT has delivered impressive results in efficiency improvements, which has enabled the firm to reduce costs, thereby improving its margins.

In addition, the company has now passed 18 million premises with fiber, thus transferring customers to faster broadband speeds, which should provide revenue growth in its Retail and Openreach divisions.

Investment guru David Dreman (Trades, Portfolio) recently incorporated BT to its portfolio in accordance with my feeling that BT’s sturdy position and latest strategic moves bolster the firm’s growth potential.

Disclosure: Vanina Egea holds no position in any stocks mentioned.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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