Thursday, March 5, 1998
Without a Big Deal, BT's Big Move Could Fade
By Vito J. Racanelli
Speculation is intensifying that BT will be involved in some sort of a merger this year. In fact, rumors are flying about the City of London that BT could be the target of a U.S. company.
With BT's market value at $61 billion, that looks like a long shot. What's much more likely is that BT will buy a U.S. telecom company to take the place of MCI Communications Corp., which BT lost to WorldCom after it cut the price it was willing to pay for the U.S.'s second largest long distance provider. Still, BT can salve its lost pride with the $7 billion in cash it will get from WorldCom for the sale of its 20% stake in MCI .
But sudden riches bring problems of their own. With the shares' brief but dizzying ride to as high as 103 earlier this week (BT's ADRs fell 3 1/8 to 96 3/8 Thursday, still up 20% from the 80 5/16 closing price at yearend), some observers are now suggesting that the stock price cannot be supported by the company's intermediate-term growth prospects. What's worse, "deal" disappointment -- highly likely given the intense expectation now built into the price -- could lead to a more sober assessment of BT's shares later this year, some argue.
For example, by most analyst accounts, the company's earnings growth through the fiscal year ending March 2000 is likely to be in the low- to mid-single digits annually, less than that of its peers and the broader U.K. market. Meanwhile, BT stock changes hands at about 18x estimated 1999 profits, in line with its European peers and at a slight discount to the overall U.K. market. And BT's share of Great Britain's long-deregulated telecommunications market will continue to erode, though perhaps at a slower pace than in years past.
That makes overseas expansion vital. But while BT has made some impressive moves in local markets all across Europe, its losses on the Continent probably won't peak until fiscal 2000, and who knows when profits will start rolling in? But the biggest question mark on BT is the centerpiece of its global growth strategy: finding an attractive asset in the U.S. With its ambitious plans to buy MCI blown apart last year, the company faces an array of expensive, unappetizing choices with which to fill that void.
Mark Lambert, a London-based analyst at Merrill Lynch , calls the company "strategically challenged." Lambert, who rates BT's stock Neutral, notes that BT could buy one or more fast-growing competitive local exchange carriers (CLECs). Specific names haven't been mentioned yet, but the group, which includes such players as IGC Communications and Nextlink Communications, already has had a nice run. Some analysts fear that the stocks' high valuations would dilute BT's earnings right off the bat.
A regional Bell operating company (RBOC) -- which all have market capitalizations upwards of $25 billion -- could prove too big for BT to swallow, and regulatory barriers would be treacherous. Even so, the RBOCs' own low-double-digit earnings growth rates probably wouldn't do much for BT's bottom line, notes ABN Amro analyst James Ross. And for various reasons, a matchup with the remaining large U.S. long-distance players -- Sprint and AT&T -- doesn't seem plausible.
And as BT's stock price runs up, the pressure is mounting on management to come up with a replacement for MCI when few appealing alternatives exist. ".Something has to happen," says Alfredo Carrozzo, a Zurich-based portfolio manager for Vontobel Asset Management, which is overweighted in the stock.
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