Tech

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

BT Group Plc just lost a round in its long-running fight to keep control of Britain's broadband network -- but the former telecommunications monopoly isn't quite out yet.

Ofcom, the country's telecoms regulator, said on Tuesday it plans to force BT to legally separate its Openreach network operation after the phone giant failed to put forward counter proposals to address the watchdog's competition concerns.

It looks like a harsh negotiating tactic. The regulator has been in talks with BT since July to try to reach a voluntary deal. If BT offers more concessions, Ofcom has said it will call off the forced legal separation process.

So BT hasn't lost the fight, but the odds of a favorable deal are increasingly stacked against the company. The debate has turned political in recent months, and BT CEO Gavin Patterson's negotiating position is getting weaker.

Openreach builds and runs the national broadband network that's not only used by BT but competitors such as Vodafone Group Plc and Sky Plc. Customers are left waiting for days for lines to be activated, and the U.K. trails other countries in offering fiber-optic broadband to consumers.

Fiber Fail
The U.K. trails most EU nations in providing fiber connections to consumers' homes
Source: European Commission/IHS
*As of 2015

Prime Minister Theresa May has complained that people in rural areas can't get decent connections, and the government lobbed 1 billion pounds ($1.3 billion) at broadband infrastructure in last week's Autumn statement.

At stake is who controls BT's biggest source of cashflow. Openreach accounted for 41 percent of Ebitda in 2016 and BT relies on those cash flows to support its pension plan, one of the largest in the country.

Cash Cow
Openreach was BT's biggest source of Ebitda in the last fiscal year
Source: Bloomberg

The regulator wants as much independence as possible, including a separate board. BT wants the unit to continue reporting to its board and CEO. If it doesn't have direct accountability over Openreach's cashflow, BT argues that its accountants could force it to stop including the business in its results.

All this, however, may become less important if the government and regulator push BT/Openreach to devote even more of that cashflow to expanding its fiber-broadband network.

Tracking Lower
BT shares have been dragged lower this year. Uncertainty around Openreach hasn't helped
Source: Bloomberg

In the meantime, regulatory uncertainty has helped push BT stock down 20 percent this year, making it one of the worst performers in the European industry this year.

Analysts at RBC Capital Markets argue a voluntary separation of Openreach is both possible and desirable. BT's board may not want to go as far as that, but the company needs to come to a compromise with Ofcom quickly. Consumers are waiting for faster internet connections, -- and the government is watching.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Leila Abboud in Paris at labboud@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net