U.K. Said to Weigh New BT Pension Pledge to End Network Spat

  • Government considering measure to allay BT structure concerns
  • Ofcom and BT are discussing future of Openreach network unit

The U.K. government is considering stepping in to help resolve a yearlong stalemate over the future of BT Group Plc’s network division by offering fresh backing for the company’s pension obligations, according to people familiar with the discussions.

A revamped government guarantee of BT’s 48.9 billion-pound ($60 billion) pension could come as soon as this month, said the people, who asked not to be identified as the deliberations are private. The March 8 budget could provide an opportunity for the government to pledge its continued support should BT’s network unit become a separate legal entity, the people said.

The government is keen to settle a dispute between communications regulator Ofcom and BT over the Openreach network of ducts and poles that the former state-owned monopoly and its rivals use to provide internet and landline service across the U.K. Uncertainty over the governance and legal structure of Openreach has weighed on BT shares and muddied the investment outlook for the country’s telecommunications industry, key to the government’s economic strategy as it prepares to divorce from the European Union.

Ministers are frustrated that it’s taking so long for BT and Ofcom to reach a compromise. The government wants BT to push ahead with a faster broadband network, which officials say is being delayed by the disagreement over the structure of Openreach. 

European Union

If the government can help BT and Ofcom come to a settlement this month, all sides could avoid a drawn-out hearing on the issue by the European Commission. Ofcom is planning to seek the support of officials in Brussels in the coming months to enforce its plan to legally separate Openreach from BT, part of the regulator’s efforts to create independence and address complaints about the network’s service and investment.

While BT has created a unique board of directors for Openreach and committed that the unit’s CEO would consult the wider industry on its investment plans, it has stopped short of agreeing to incorporate Openreach as a separate company. BT has argued that the requirement to transfer 32,000 employees that run the network as well as the division’s assets into a new company would put its pension at risk. The U.K. government’s current guarantee, created when the company was privatized, wouldn’t apply with a legal separation, BT has argued.

Matt Hancock

Photographer: Jason Alden/Bloomberg

Matt Hancock, the digital policy minister, is leading the talks from the government side, and is in regular contact with BT executives and with officials at Ofcom, an independent regulator. Hancock has pushed for a full-fiber network in the U.K., rather than the so-called G.fast technology BT’s Openreach is largely pursuing to deliver faster broadband, using both fiber and copper.

“We have made clear our requirements for a more independent Openreach that will deliver for all of its customers,” Ofcom said in a statement. “We continue to discuss the details with BT and we have the power to impose these changes if required.”

Government representatives had no immediate comment. BT declined to comment.

BT shares rose as much as 3 percent, their biggest intraday gain since Jan. 11. They advanced 2.3 percent to 335.95 pence at 3:28 p.m. in London.

The shares are down 30 percent over the last year as Chief Executive Officer Gavin Patterson fights battles on multiple fronts: an accounting scandal in Italy and revenue declines among its U.K. public-sector and international corporate businesses that led to writedowns and a reduced profit outlook from the company in January. It’s also vying with Sky Plc to hold onto key Champions League soccer rights in an auction that closed on Wednesday.

‘Humbling’ Year

Patterson said Thursday that he’s hopeful the Openreach issue can be settled.

Gavin Patterson

Photographer: Chris Ratcliffe/Bloomberg

“I think it’s in everybody’s interest that we do find a resolution so I remain optimistic, we’re still talking,” he said in an interview at a conference in London. “There are some things we need to resolve.”

In an earlier speech on Thursday, Patterson struck a conciliatory tone, saying the company “underestimated” complaints from Ofcom and others over service and investment at Openreach and has “listened to the criticism.” He pledged that BT would emerge stronger after a year of tumult.

“The last year, in particular, has been humbling for us all at BT,” Patterson said. “This has eroded trust in our brand.”

Big Deficit

While BT’s pension had almost 49 billion pounds of assets at Dec. 31, its liabilities were 59.3 billion pounds, leaving a deficit of 9.2 billion pounds after adjustment for taxes. That’s narrower than the 9.5 billion pounds the company reported at Sept. 30, but investors have grown more concerned with BT’s obligations as its financial performance has deteriorated.

The company said in January that at the end of this month it expects to increase its operating charge for the pension by tens of millions of pounds this year. The writedown of the Italian operation and reduced profit forecast led Moody’s to lower its outlook on BT debt to negative.

“So far, we tolerated a higher pension deficit because it was balanced against our expectation of BT’s improving operating performance,” Laura Perez, the ratings firm’s senior analyst on BT, said then. “However, the profit warning will further delay the deleveraging that we had anticipated in the context of relatively high leverage ratios.”

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