BT/Drahi: financially feasible does not mean politically advisable

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It is good to talk, BT Group told customers in an old marketing campaign. One thing most UK politicians prefer not to discuss is a takeover of the national telecoms champion. They would almost certainly oppose this.

M&A chatter persists nevertheless. This is because Patrick Drahi has amassed an equity exposure of 24.5 per cent. He has agreed he will attempt no full offer for BT before November 24.

Lex has assumed the highly leveraged French telecoms tycoon could not afford BT anyway. The business has an enterprise value of £26bn today, before leases. But James Ratzer of New Street Research is challenging that notion.

Assume Drahi offered £1.70 per share, his first cost price. That would mean paying £12.5bn for the BT shares he does not control, a 43 per cent premium to the three-month average. Drahi could cover 40 per cent of this price with debt backed by BT’s dividend stream, and 60 per cent equity from Drahi’s holding company.

Ratzer assumes that BT would raise additional debt under Drahi’s ownership. This first tranche could amount to £9.8bn. That would repay the holding company’s outlay of £7.5bn leaving £2.3bn to wipe out other debts within Drahi’s empire.

He would need to appease BT’s pension trustees. They would worry that if BT struggles financially, a solvency deficit of at least £11.6bn would not be covered. That could require a large upfront payment of about £6.5bn plus annual payments of £300mn.

Overall, BT’s net debts would soar to nearly £31bn. The multiple of ebitdal (which excludes leases) would rise to 4.3 times. Change of control clauses would trigger bond refinancings, increasing costs.

Drahi could reduce debts by selling broadband infrastructure group Openreach, valued at about £23bn. But disentangling it from BT would be tricky.

The upshot, for Lex, is that the purchase might be financially feasible, by structuring it as a leveraged buyout. However, this would only increase political resistance. Cries of “asset stripping” would echo around the City and Westminster. Drahi’s motives therefore remain as opaque as ever.