BT-Verizon deal puts global telco ghosts to bed

BT

Today 12:10

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Liam  Proud
LONDON, June 29 (Reuters Breakingviews) - Telecom companies once used international joint ventures to take on the world. Now, JVs are a handy way to retreat from it. London-based BT BT.L on Monday announced a partnership with U.S. giant Verizon Communications VZ.N, under which the two broadband-to-mobile carriers will create a new 50-50 company focused on multinational corporate clients, with $4 billion in annual revenue. It's a wise move, but one that also shows how low the sector's animal spirits have fallen in the last few decades.
BT's international unit dates back to a more gung-ho era in the telecom sector's history. One of the many hot areas, at the time, was serving global corporate clients. Imagine a bank or retailer with offices, call centres and stores in different countries, and which might like a one-stop shop for mobile and broadband access rather than stitching together its own patchwork solution. In the 1990s — when the internet and cell phones were still relatively new — telco CEOs thought this would be a massive business, which they hoped to tap through JVs with international peers.
It all fell apart when the dotcom boom ended. BT, for example, in 2001 said it would take a $2 billion hit to scrap Concert, a JV with AT&T T.N formed in the late 1990s. Reports at the time suggested that there was too much overlap between the venture and the parent companies, which had domestic wholesale businesses of their own. Ironically, Concert was originally a partnership with a different American telco called MCI, which ended up being part of Verizon many years later.
Fast forward to today, and BT International is hardly thriving. Analysts reckon the top line will be some $2.4 billion this year and shrink thereafter, with negligible EBITDA and an operating loss. The revenue number suggests BT's unit will contribute 60% of the new JV's total, which may explain why the British company is getting a $625 million "equalisation payment" from Verizon. These transfers are typically necessary to compensate the larger party in ​a 50-50 venture.
That cash bonus, and the chance to deconsolidate a shrinking loss-making asset, make the new JV a worthwhile deal from BT's perspective. CEO Allison Kirkby is delivering on her pledge to focus on the UK. New Street Research analysts reckon the deal values the international assets at nearly 12 times EBITDA, far higher than the mid-single-digit valuation multiples at which American and European telcos tend to trade.
Still, pivoting more deliberately to a slow-growth domestic market is hardly an exciting move. So-called altnets, which are challenger broadband builders, have been snapping at BT's toes. Elon Musk's SpaceX SPCX.O is making a play for more retail satellite-internet customers. In other words it's no surprise that international telco JVs are now more staid affairs than in the 1990s — because the rest of the market is too.
     
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CONTEXT NEWS
BT and Verizon Communications have agreed to put their respective international operations into a 50-50 joint venture, the telecommunications companies said in a June 29 statement. 
The combined group will have over 3,000 customers in more than 180 countries, with roughly $4 billion in annual revenue. 
BT-compiled analyst revenue forecasts for the UK group's international unit are around £1.8 billion ($2.4 billion) for the current financial year, implying that it is contributing the larger of the two businesses. BT will receive a $625 million "equalisation payment," according to the statement. Such payments are usually necessary to compensate the party that is putting a larger operation into a 50-50 venture. 
     Shares in BT were up 0.6% as of 0936 GMT on June 29.
($1 = 0.7568 pounds)

(Editing by Neil Unmack; Production by Maya Nandhini)
((For previous columns by the author, Reuters customers can click on PROUD/liam.proud@thomsonreuters.com))