BT and Ofcom agree legal separation of Openreach, 'bullet dodged' analysts say

Under pressure from the telecoms watchdog and rival firms, BT Group has agreed to legally separate its Openreach infrastructure arm this year, but will still retain legal ownership of the assets and keep the unit within the wider group.

The new Openreach will have roughly 32,000 staff transferred from BT, plus its own management, independent board and own logo, but still be within the BT group.

Calling it the "biggest reform" of the UK telecoms infrastructure company in its history, regulator Ofcom said Openreach Ltd will have "the greatest degree of independence from BT Group without incurring the delays and disruption – to industry, consumers and investment plans – associated with structural separation or the sell-off of Openreach to new shareholders".

Assets, such as the physical national broadband and phone network, will be controlled by Openreach alone.

The Openreach board will make decisions on building and maintaining its physical assets, with BT handing these powers to Openreach while still retaining a title of ownership.

Openreach's chief executive, who will in future be appointed by the Openreach board, will have a separate strategy and control over budget allocation within an overall budget set by BT Group.

Reporting to the Openreach chairman, the CEO will still be accountable to BT chief executive Gavin Patterson and his eventual successors, which the company said was related to certain duties consistent with BT’s being a listed company.

BT agreed to all of the changes needed to address Ofcom’s competition concerns, which Ofcom said meant it would not need to impose these changes through regulation.

A spokesperson from rival Sky said the announcement was "a welcome step that we have long called for on behalf of our customers".

"A more independent Openreach is a step towards delivering better service to customers and the investment that the UK needs. It's important that today's agreement is now implemented by BT in good faith and without delay."

However, investors felt it was mostly good news for BT, with shares in the former state monopoly rising more than 4% on Friday morning to 344.05p, their highest since late January's profit warning due to problems in its Italian arm.

Sky shares were flat, TalkTalk was up 0.3% as was Vodafone.

BT has 'dodged a bullet'

"Today’s news confirms what investors had been hoping for since July when BT dodged a bullet as Ofcom said it wanted Openreach hived off into a separate company with its own board within the group," said analyst Neil Wilson at ETX Capital.

"The regulator could have forced BT to shed the infrastructure part of the business completely to address concerns around competition."

Consumer telecoms expert Dan Howdle of Ofcom-accredited Cable.co.uk, said Openreach will finally be committed to acting equally in the interests of all providers, "allowing them finally to act on behalf of their own customers and to affect future strategy and investment decision-making associated with the Openreach network".

He added: "This is a good day for the average broadband, TV and phone customer too, who will enjoy all the benefits the stoking of competition in a fairer marketplace is likely to bring, without suffering the costs and delays to infrastructural rollout a full separation would have incurred. We should not, however, rule out a full separation happening at some point in the future."

Mike van Dulken, head of research at Accendo Markets, felt that where the agreement is "rather more interesting" was the focus on legal separation rather than genuine independence, with Patterson still able to veto the appointment of the Openreach CEO, simply by notifying regulator Ofcom.

"This veto is only mentioned in the Ofcom statement. Does its absence from BT’s own release say something about independence? Ofcom saying the deal seeks the “greatest deal of independence” also suggest it doesn’t quite fully deliver in terms of true autonomy," he said.

"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, VOD and TALK have barely moved suggest doubts there too?"

Joshu Mahoney at IG felt the deal was great news for consumers, with increased investment and competition likely to ensue.

"Without the need to contribute towards a wider BT balance sheet, Openreach can now concentrate on improving their services, which is good news for the economy as a whole. With the likes of TalkTalk, Sky and Plusnet all utilising the Openreach fibre infrastructure, there is likely to be a better environment for those firms, with BT no longer gaining first dibs on capacity."