BT Group plc (LON:BT.A) has announced today it will legally separate from its network division Openreach, which controls the UK's broadband infrastructure, after reaching an agreement with regulator Ofcom.
The UK watchdog in November said it was preparing to approach the European Commission to try to force BT to separate from Ofcom after failing to address competition concerns.
In a statement today, BT revealed it has acceded to the move after two years of talks, which means Ofcom will no longer need the commission to enforce its plan.
BT said about 32,000 employees will move over to the new Openreach Limited under transfer of undertakings protection of employment (TUPE) regulations and once pension arrangements are in place.
Openreach, which builds and maintains the UK's main telecoms network used by providers including Sky plc (LON:SKY), Talktalk Telecom Group plc (LON:TALK), Vodafone Group plc (LON:VOD) and BT Consumer, will operate as its own entity with a separate board.
"This has been a long and challenging review where we have been balancing a number of competing interests,” said BT’s chief executive Gavin Patterson.
“We have listened to criticism of our business and as a result are willing to make fundamental changes to the way Openreach will work in the future."
Ofcom last year said the separation would help improve competition and boost the roll-out of superfast broadband but BT had resisted.
Competition concerns...
The current structure, introduced by Ofcom in 2005, was met by concerns that BT was making decisions to benefit its own retail business.
BT's rivals complained that it had an unfair advantage and claimed the group was responsible for delays to the roll-out of broadband as it was being too slow in opening up the network to other operators.
Last July MPs also accused BT of not investing enough in Openreach.
Sharon White, Ofcom chief executive, said: "This is a significant day for phone and broadband users. The new Openreach will be built to serve all its customers equally, working truly independently and taking investment decisions on behalf of the whole industry - not just BT."
"We welcome BT's decision to make these reforms, which means they can be implemented much more quickly. We will carefully monitor how the new Openreach performs, while continuing our work to improve the quality of service offered by all telecoms companies."
Welcome news for rivals...
A spokesperson for Sky said the separation was a welcome step that the company has long called for on behalf of its customers.
"A more independent Openreach is a step towards delivering better service to customers and the investment that the UK needs," Sky said.
"It’s important that today’s agreement is now implemented by BT in good faith and without delay."
Vodafone said it was an encouraging start and the move should improve the market for Openreach customers.
"We look forward to reviewing the detail of how Ofcom will properly enforce Openreach’s new structure to ensure the UK gets the ultrafast fibre networks it will need to compete effectively in the global gigabit economy," a spokesperson said.
TalkTalk chief executive Dido Harding said the new Openreach company will be better placed to deliver improved investment and services to consumers and businesses.
"This deal will require robust Ofcom monitoring and enforcement to ensure it delivers the improvements the regulator expects," Harding said. "We hope this is the start of a new deal for Britain’s broadband customers, who will be keen to see a clear timetable from Openreach setting out when their services will improve.”
BT still holds legal assets...
While BT's announcement was seen as important step towards improving competition, Openreach still remains within the group and it will continue to hold the legal assets. Mike van Dulken, head of research at Accendo Markets questioned whether the deal delivered true autonomy of the network.
"Where it gets rather more interesting, however, is all the focus on ‘legal separation’ rather than genuine independence," he said.
The analyst said Openreach board’s plans must still fall within the strategic and financial framework of BT. The chief executive of Openreach will have to report to its chairman who is accountable to BT's chief executive Patterson. Patterson can also veto the appointment of Openreach's chief executive by notifying Ofcom.
"All this begs the question whether Openreach will have the true independence being demanded by customers and competitors to foster real competition on the UK network. Is this simply a legal fudge on an existing sUBSidiary to get everyone off its back? Was Ofcom so tired of it all that even it thought ‘that’ll do’? Does the fact that shares in competitors Sky, Vodafone and TalkTalk have barely moved suggest doubts there too?"
However, hiving off Openreach made it almost impossible for BT due to the sheer size of the company so the separation was "the best thing they can do", he told Proactive Investors.
Roll-out of 5G...
With the issue of what to do with Openreach no longer hanging over BT's head, van Dulken said it may allow the business to move forward with its plans, including the roll-out of 5G mobile technology.
In December BT announced it has joined forces with communications firm Huawei to conduct research into deploying 5G. The technology is expected to surpass 4G to provide faster data uploads and downloads. It is expected to be deployed some time after 2020.
Chancellor Philip Hammond revealed in the Spring Budget on Wednesday the trial of the 5G technology will receive £16mln in funding.
Postive for investor sentiment...
UBS said it sees the deal as a postive for investor sentiment on BT as it avoids a prolonged period of uncertainty that could have led to possible action from the commission. The bank said the announcement brought no negative surprises and removes a notable overhang.
UBS reiterated a 'neutral' rating, adding that BT has managed to dodge the consolidation of the network and any consequences for pensions.
"There are no new announcements on capital expenditure from BT today, but we believe BT is willing to commit to rolling out faster broadband to the last 5% of homes and may also increase its level of fibre to the premises (FTTP)/fibre to the home (FTTH) rollout depending on the outcome of the pending wholesale local access (WLA) review that will determine whether there should be regulated pricing for fibre."
BT's shares rose 4.13% to 343.80p in morning trading.
--Adds reaction from rivals and analysts, updates share price --