U.K. Regulator Says BT's Network Business Needs Reform -- Update

By Simon Zekaria 

LONDON--The U.K.'s communications regulator on Thursday said BT Group PLC must open up more of its network to rivals, but stopped short of forcing the incumbent telecommunications firm to spin off its lucrative infrastructure arm.

BT, a former state-run monopoly known as British Telecom, lays down most of the U.K.'s telecoms lines and makes a hefty chunk of its revenue though its Openreach division by connecting up the country's copper wire and high-speed fiber-optic cable network. For years, BT has faced calls for increased regulatory pressure on the division by rival operators, which lease the network on a wholesale basis to reach their own customers.

The U.K.'s Office of Communications, or Ofcom, said BT should allow easier access to its cables for other operators to build up their own fiber networks. BT competes with companies like Vodafone Group PLC, Sky PLC and Liberty Global PLC's Virgin Media in the rapidly-developing market for combined telephony, Internet broadband and media services.

Ofcom also said Openreach, which recorded 40% of BT's operating profit in the year to end of March 2015, needs to take its own decisions on budget, investment and strategy. Openreach also provides financial power to BT as the group's largest contributor of free cash flow.

"It is necessary to overhaul Openreach's governance and strengthen its independence from BT," Ofcom said, following a once-in-a-decade review of the U.K.'s digital communications industries.

Ofcom, which will submit detailed proposals later this year, said it might require Openreach to become a "ring-fenced, wholly-owned subsidiary" of BT, with its own board members.

It also warned that it could still demand that BT separates off entirely from Openreach.

"Openreach does need major reform," said Ofcom Chief Executive Sharon White.

BT shares rose nearly 3% in early deals, as investors reacted warmly to Ofcom not immediately forcing a structural breakup of BT.

"BT will breathe sigh of relief. Openreach contributes significant profits to the company," said CSS Insight analyst Paolo Pescatore.

UBS analyst Polo Tang added the outcome is "relatively benign" for BT.

In response, a BT spokesman said the company is ready to propose "a new governance structure for Openreach as well a clear commitment on investment."

"Openreach is already one of the most heavily regulated businesses in the world but we have volunteered to accept tighter regulation," said the spokesman. "We are happy to let other companies use our [network] if they are genuinely keen to invest very large sums as we have done."

Last year, The U.K. government called for the country's homes and businesses to have universal access to fast Internet broadband.

A Vodafone spokesman welcomed Ofcom's move, but said BT needs to invest more in fast fiber connections.

A spokesperson for Sky said: "We believe the simplest and most effective way to fix the current broken market structure is for Openreach to be completely independent. We are pleased to see that separation is still on the table."

Ofcom announced last July that it was considering whether BT should be split up after completing the first part of its review, where a major focus had been on whether there is sufficient competition benefits to consumers and businesses.

Rivals have called for BT to be broken up to limit the power and reach of Openreach, but BT says retaining its ownership of the division is key to making investment across the U.K.'s broadband network.

In the U.K, as elsewhere in Europe's consolidating telecoms and cable markets, operators are battling for subscribers in an intensified media services fight as they bundle together fixed telephony, mobile, broadband Internet and pay-TV.

BT has spent heavily on a range of sports channels and sports rights to develop its TV service and in Feb. 2015 moved to acquire mobile operator EE in a multibillion-dollar deal, which has raised the stakes in the industry.

Ian Walker contributed to this article.

Write to Simon Zekaria at [e-mail]

(END) Dow Jones Newswires

February 25, 2016 06:28 ET (11:28 GMT)

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