the times | Saturday December 18 2021 63

Business

Dominic O’Connell

Potential investors will need to beware

the £60 billion cloud hanging over BT

government is to achieve its

ambitious targets on full-fibre

connectivity, and in theory it should

be able to sit back and watch the

money roll in once it gets over the big

hump of investment in new cables

and installation. Think of it as a

proto-National Grid but even better,

as demand for online services is

racing ahead. BT’s market value is

about £16 billion; some analysts think

a standalone Openreach could be

worth more than twice that. Find a

way neatly to divide BT, the theory

goes, and it’s trebles all round.

This is where that frowning cat

comes back into the picture. As well

as potential for the future, BT carries

the legacies of the past, notably a

pension plan (actually three plans)

with combined liabilities of

£60 billion and a deficit, according to

last year’s triennial valuation, of just

under £8 billion. BT has agreed with

the trustees a ten-year plan to reduce

the deficit, a standard and necessary

move in companies with sizeable

pension holes. But it does not end

there. The trustees have also

squeezed BT’s management into a

capital-allocation straitjacket. If there

is any money to spare they want to

make sure that they get their slice. BT

has agreed to curbs on share

buybacks and special dividends unless

extra money also flows into the

pension. On top of that BT has

pledged that if it sells something for

more than £750 million (more than

£1 billion after 2023), one third of the

proceeds has to go into the pension. It

is all in the annual report and, if you

doubt how important pensions are to

the future of BT, note 20 in the

accounts, which deals with the

retirement schemes, is 11½ pages long.

So what would happen if Drahi, or

the current management, wanted to

break BT in two? Presumably they

would want the new Openreach to be

free from the worries of future nasty

pension surprises so the scheme

would stay with the rump BT. The

trustees and the pensions regulator

do not have the power of veto but

they could make the process difficult

and perhaps come back with a

demand on Openreach in a few years’

Patrick Drahi, the

Swiss-based

billionaire who is

quietly wrapping his

arms around BT,

knows a thing or two about big

numbers, and not just from counting

his fortune: both his parents were

maths teachers. That should come in

handy, as the future of the British

telecoms company is all about the law

of big numbers, in particular its

outsize pension scheme, which hovers

like a fat, unsmiling Cheshire cat over

any plan for radical action.

Leaving the cat to hover for a

moment, it is not hard to see why

Drahi is cosying up to BT. It has been

the unloved stepchild of the telecoms

industry for more than a decade.

Despite its size and strong position in

the UK it is seen as a company still in

transition from a well-padded quasi-

monopoly of things that don’t matter

any more, like traditional telephone

services, to the trusted provider of

Britain’s new superfast fibre-optic

broadband and 5G mobile internet

services. The transition seems to have

gone on for ever. In the early

Noughties I was summoned by BT’s

chairman, the late Sir Christopher

Bland, to be told how everyone had

BT wrong: it was no stuffy backwater,

it was going to surge forwards into a

bright new future surfing on the

blazing wave of the internet. On the

way out of his office, in the hulking

grey BT Centre close to St Paul’s

Cathedral, I walked past row after

row of middle-aged white men in

cardigans, and wondered if the

message had filtered down to them.

For a brief period the City also

believed the story. BT was a big

beneficiary of the first dotcom boom.

The shares went to just over £10 on

December 30, 1999. They have never

recovered that former glory, sloshing

around under £2 for much of the

intervening two decades. There was a

rally in 2015, when they went close to

£5, but they have been in a slump

since then and closed yesterday,

despite a week of takeover

speculation, at £1.67¼p.

Some think there might be a route

back to that brilliant future.There is a

glaring mismatch between BT’s stock

market valuation and the potential of

its Openreach division, the arm of the

company that is doing the heavy

lifting on installing fast broadband

around the UK. Openreach is about

the only game in town if the

Johnson

Matthey

sells drugs

unit at loss

Robert Lea Industrial Editor

A FTSE 100 former star of the

advanced chemicals sector, has con-

tinued its clear out of unwanted busi-

nesses with a loss-making exit from the

drugs industry.

Johnson Matthey has sold its division

helping to make the active ingredients

for generic drugs including treatments

for opioid addiction, in a deal with US

private equity that values the operation

at £325 million.

It follows quickly on from the group’s

controversial decision to give up on the

technology race with Korea, China and

Japan to build efficient, affordable

long-range electric vehicle batteries.

That U-turn last month came along-

side the departure of Robert MacLeod,

the group’s chief executive.

Shares fell as investors tried to fath-

om a decision that came after years and

hundreds of millions of pounds of

investment in lithium nickel oxide tech-

nology, which was so advanced that

Johnson Matthey had committed itself

to the construction of two factories.

News of its exit from the drugs

market, first signalled in the spring,

helped put the brake on the falling

share price, down more than 35 per cent

from its 2021 high. Outside the collapse

at the advent of the pandemic, the stock

is trading at a ten-year low. Yesterday

the shares fell 29½p to £19.62½p.

The drugs deal with Altaris Capital, a

New York healthcare investor, will

mean that Johnson Matthey will retain

a 30 per cent stake in a business that last

year made £31 million of operating

profits on £237 million of revenues.

It will receive a £150 million upfront

payment and two further performance

dependent payments of £50 million.

The sale will also trigger a £200 mil-

lion charge in Johnson Matthey’s next

accounts showing the scale of the

difference between what the group

previously valued the business at and

what it is selling it for.

Against that, Johnson Matthey said it

would be able to divert £150 million of

capital investment that had been set

aside for the drugs business and instead

spend it on where it was now focusing.

The group made its money in recent

decades helping catalytic converters to

clean up diesel engine emissions, a

market in terminal decline as the auto-

motive industry moves away from fuel.

The group’s new road is about hydro-

gen technologies and the decarbonisa-

tion of chemicals and fuels, said Ma-

cLeod, although his successor is due to

reveal his strategic plan next spring.

time. How big is the cheque BT would

have to write to make the problem go

away? Start with the deficit of

£8 billion. The pensions expert John

Ralfe reckons the rule of thumb for

situations like this is to add another

30 per cent, so someone would have

to find more than £10 billion.

At this point a clever banker might

point out that there is a potential

get-out-of-jail-free card. BT’s pension

has a Crown guarantee attached, a

promise that pensioners will get their

money even if the state has to step in.

It was put in place at privatisation in

1984 and the trustees went to court a

decade ago to test in what

circumstances it would apply. The

answer is that it would kick in “in the

highly unlikely event that BT became

insolvent”. Might someone try to find

a way round this, spirit off BT’s

valuable assets and leave the taxpayer

to foot the bill? I very much doubt it.

Private investors have often been

able to find value in old telecoms

companies and the giant American

private-equity firm KKR has made a

€33 billion offer for Telecom Italia,

once, like BT, a state-owned

company. There is, however, one big

difference: Telecom Italia does not

have a pension scheme bigger than

the company that supports it. No

such luck for Drahi at BT.

Thick skin

When Avon Protection bought

Ceradyne, a US body armour

company, two years ago it knew it was

taking on a potential problem. The

US Department of Defense had

changed its armour specifications and

the company told investors this week

that this was known “at the time of

acquisition”. As it turned out: “Both

Avon Protection and the department

underestimated the technical

challenge.” Avon’s reworked armour

failed tests and the division is now

being wound down. The result?

Avon’s shares have fallen from £42 a

year ago to £11.25p. I asked the

company if Paul McDonald, the chief

executive, would take the rap and

stand down. No, was the answer.

Perhaps Avon should consider a new

armour based on the

composition of Mr

McDonald’s skin, as

he appears utterly

bulletproof.

‘‘

’’

Dominic O’Connell is business

presenter for Times Radio