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BT Sees $650 Million Hit from Britain’s New Limits on Huawei

Thomas Seal

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BT Group Plc is expecting a 500 million-pound ($650 million) hit over the next five years from the U.K.’s decision to restrict Huawei Technologies Co. in the nation’s broadband infrastructure.

Chief Executive Officer Philip Jansen said Thursday the telecommunications company is reviewing the government’s guidance to determine the full impact on its plans. Huawei is one of BT’s biggest suppliers of telecom equipment, and in the U.K. has a 44% market share in full-fiber components.

BT shares fell 6.3% at 9:37 a.m. in London after the company reported third-quarter profit that missed analyst estimates. The impact on BT of the new rules on telecom suppliers was “worse than expected,” said analysts led by Carl Murdock-Smith at Berenberg.

Britain decided on Tuesday to ban the Shenzhen-based vendor’s gear from the core of new wireless networks and cap its market share in next-generation 5G technology and fiber-to-the-home at 35%. Carriers have three years to make the needed changes. Though BT had already begun efforts to remove Huawei from the core of the EE mobile network it acquired in 2016, it will now need to lean more on other suppliers such as Nokia Oyj for the rest.

U.K.’s Huawei Limits Invite New Players to Redraw Telecom Market

The bulk of the cost to meet the new guidelines will come from the need to switch some Huawei 4G kit to gear made by a different supplier, in order for new 5G equipment to be layered on top of the older antennas, Jansen said on a call with reporters.

“Targets stay the same, costs go up, and there’s a lot of operational upheaval. But we can manage it,” Jansen said. As for the time limits, Jansen said that three years is “one of the options we considered, and what we said today is we can do that, no problem.”

His initial assessment is the first from one of the nation’s top carriers. For BT, the matter is not the only regulatory issue that could weigh on its future.

Fiber Investment

BT also called for more clarity on the U.K.’s push to roll out fiber-optic broadband across the country, pointing to the need for a fair return on further investment, and lower property taxes. A step-up in construction could need an extra 400 million pounds to 600 million pounds per year, which may need to be funded from a cut to the dividend or additional borrowing.

“Boris’s objective of full fiber to the whole country by 2025 is possible. It’s just very very hard. And we have no time to waste,” Jansen said on an call to reporters. “My sadness is I don’t think those things will get resolved quickly and therefore he may well miss” the target.

BT reported adjusted earnings before interest, tax, depreciation and amortization of 1.98 billion pounds, versus a company-compiled consensus of 2 billion pounds. The miss was due to underperformance at the company’s IT services division.

Prospects for a marked improvement in profitability any time soon are dim: Rivals have undercut BT on prices for new 5G mobile services, Vodafone Group Plc has poached key enterprise customer Liberty Global Plc, while watchdog Ofcom is introducing rules which make it easier for customers to find lower tariffs and switch providers.

What Bloomberg Intelligence Says

“A cut to BT’s dividend from fiscal 2021 now looks almost inevitable, in our view, as higher 5G and full-fiber network build-out costs add to an enduring squeeze on profit from regulation and rivalry.”

--Matthew Bloxham, telecom analyst

Jansen said the profit result was “slightly” below expectations, and “we remain on track to meet our outlook for the full year.”

However James Ratzer and Ben Rickett, analysts at New Street Research, questioned the company’s ability to achieve profit growth by next year, and said the costs from the government’s Huawei decision could be a precursor to a reduction in free cash flow expectations.

The consensus of analyst estimates published by BT is for Ebitda to increase 0.2% by the end of the fiscal year ending in March 2021. Jansen’s predecessor, Gavin Patterson, said in May 2018 that Ebitda could return to growth from 2021.

“The current Ebitda trends will also raise questions on whether FY21 Ebitda can grow, as consensus and the company currently expect,” the analysts said.

(Adds CEO quote in sixth and ninth paragraphs, analyst comment in last paragraph, updates share price)

To contact the reporter on this story: Thomas Seal in London at tseal@bloomberg.net

To contact the editors responsible for this story: Rebecca Penty at rpenty@bloomberg.net, Jennifer Ryan

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