BT must legally separate Openreach, Ofcom rules
Ofcom has ruled that BT must legally separate from its Openreach infrastructure arm due to its failure to satisfy the regulator's competition concerns.
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BT made a move late on Monday to try and prevent the enforced spin-off with the appointment of a former director of the telecoms regulator, Mike McTighe, as chairman of Openreach but this seems not to have proved sufficient.
However, not only has Ofcom offered the company the chance to address its outstanding concerns, the legal separation still means Openreach, the division that develops and maintains most of the UK's broadband cables and boxes used by BT, Sky, TalkTalk, Vodafone, Plusnet and many smaller providers, is likely to remain a subsidiary of the former state monopoly.
The regulator said: “We are disappointed that BT has not yet come forward with proposals that meet our competition concerns. Some progress has been made, but this has not been enough, and action is required now to deliver better outcomes for phone and broadband users.”
Ofcom said a more independent Openreach, which worked in the interests of all providers, such as Sky, TalkTalk and Vodafone, would provide a better service.
Although the regulator said it would "remain open" to further proposals from BT to address its outstanding concerns, it has already begun to prepare a notification to the European Commission to require the changes to increase Openreach’s independence.
"We have already discussed this with the European Commission and expect to consult publicly on a submission to the Commission in the early part of next year. We then intend to proceed quickly to submit a detailed plan to the Commission and, subject to its decision, implement the reforms of Openreach so the UK can benefit as soon as possible."
Ofcom said it would push for Openreach to remain a wholly-owned subsidiary of BT, which it felt was likely to achieve the "greatest improvements for everyone in the shortest amount of time".
McTighe, who worked at Ofcom for eight years, is due to start his new role in January and will select further members to join the Openreach board, BT said in a statement.
The company said that in order to address concerns and implement governance changes it has created a board with an independent chairman to work with chief executive Clive Selley.
BT chairman Sir Michael Rake, said: “We promised in July to create an Openreach board and we are delivering on that promise. I remain hopeful this significant move by BT can help to underpin a sustainable, proportionate and fair regulatory settlement that is in the interests of the whole country."
McTighe said it was “clear that Openreach needs to up its game on service and regain the trust of the people we serve in the industry and across the UK”.
BT said it is currently in discussions with Ofcom about the reporting line of the Openreach chief executive and the form of legal incorporation.
It added: "We will continue to work with Ofcom to reach a voluntary settlement that is good for customers, shareholders, employees, pensioners and investment in the UK's digital future."
Rival Sky said that it wants a solution to Opeanreach to be "clear and executable".
“Let’s not forget why we are here – BT Openreach has continued to fail consumers. This is why we have always said that we want a solution that is clear and executable and in the best interests of consumers and industry. We will now watch closely as to how Ofcom executes its proposals.”
Reaction
Shares in BT initially slid 1.5% before levelling off, with analysts suggesting Ofcom's ruling is not as harsh as it could have been.
Neil Wilson at ETX Capital said BT dodged a bullet in July when Ofcom said it wanted Openreach hived off into a separate company rather than forcing BT to shed the infrastructure part of the business completely.
"This meant BT keeping hold of its prized asset and Ofcom isn’t really saying anything radically different today in terms of the actual meat of the changes. What’s concerning investors is the detail of the separation, such as the transfer of pension liabilities and budget autonomy - BT’s pension black hole has ballooned to top £10bn and this is a concern for investors."
Dan Howdle, a consumer telecoms specialist at Cable.co.uk, said: "It's tough to read whether BT's heel-dragging is as a result of a tactic with the intention to deliberately delay and undermine the process, or whether, rather like Brexit, the process of separating Openreach is simply too vast and complex to be fully planned out in such a short period of time.
He added: "That Ofcom has had to speak out of its 'frustration' suggests to me there is more to this delay than bureaucracy and red tape – that unwillingness to comply is also playing some part.
Mike van Dulken, head of research at Accendo Markets, said on the news shares in rival TalkTalk were near the top of the FTSE 350 on Tuesday, while Ofcom would have to notify Brussels of the proposed spin-off.
“It is especially significant for smaller peers and competitors like TalkTalk (hence its share price outperformance vs Sky) in that it would likely result in significantly more transparency about Openreach, especially how profitable the infrastructure division that they piggy-back actually is.
“Ironically, so soon after Brexit, Ofcom is having to alert Brussels of its intention to launch legal plans to require Openreach to become more independent. Given that the ultimate goal is lower costs and more competition, something that could benefit all UK households and businesses (even if it doesn’t help BT shareholders), I wonder how Brexiteers will feel about having to get the OK from Europe? Perhaps BT shares have bounced back to positive territory on hopes that Europe, for all its red tape, will actually complicate the matter and delay the process.”
Shares in BT were up 0.23% to 351.10 p at 0943 GMT and shares in TalkTalk rose 4.39% to 164p at 0941 GMT.