BT Group plc (LON:BT.A) may have to spend twice as much as it had planned on upgrading the UK’s broadband network after the government rejected its voluntary offer to deliver improved speeds to rural homes, Deutsche Bank said.
The telecoms giant's Openreach subsidiary, which is responsible for the broadband infrastructure, had offered to spend £450mln to £600mln over three years to improve speeds to at least 10Mbps for 1.1mln rural homes.
READ: BT voluntary offer to improve broadband speeds rejected by government
The government turned down the offer and will instead enforce the legal right to an upgrade of the network to ensure it can deliver on its promise to increase broadband speeds for those in remote areas by 2020.
USO to impact brodband providers
The Universal Service Obligation (USO) regulation will require firms to supply high-speed broadband to customers who request it, subject to a cost threshold.
Ofcom has estimated that it would cost £1bn, roughly twice BT’s proposed spend, to upgrade speeds to 10Mbps for 1.1mln rural homes and £1.7bn to deliver 30Mbps to 1.9mln homes, Deutsche Bank said.
“It is difficult to say whether on a like-for-like basis a USO approach will be more negative or not for BT’s near-term cashflow until the terms of the USO and funding thereof are finalised,” the bank said, repeating a ‘sell’ rating on the stock.
“However, the voluntary approach sought to avoid a legal minimum broadband speed which could be raised, and cost more over time.”
Upfront costs could affect BT's cashflow estimates
A legal definition of minimum download speed could encompass more onerous definitions of upload speeds, latency and contention, Deutsche Bank added.
Extra costs will also arise from the fact that a voluntary upgrade would have meant BT avoided building in the most hostile areas.
BT will be entitled to recoup any costs beyond a reasonable threshold through a surcharge on all UK fixed and possibly mobile customer bills but Deutsche Bank said upfront capital expenditure (capex) could impact the company’s near-term free cash flow expectations.
“Further importantly, BT may not be the designated service provider of any USO and whilst that would save capex, would cede BT share in rural areas, where the company has a de-facto monopoly, and would be a poor longer-term outcome.”
Shares edged down 0.4% to 269p in morning trading.