The old British Telecom, BT (LON: BT) shares jumped 10% at one point yesterday before falling back to only a 6% rise. The trigger was a single report in an Indian newspaper, The Economic Times, that Mukesh Ambani’s Reliance Industries was going to make a bid. This was swiftly and categorically denied which explains the fall back.
That this specific bid isn’t going to happen – the denial was categoric enough to ensure that they cannot now change their minds for 6 months – isn’t the point. That the price moves 10% merely on the one newspaper report is. Because that sort of movement simply on the back of little more than a rumour means that the wider market is willing to accept the idea that a bid could happen. Could be financed, could be done and that someone might actually want to make and conclude one.
There is also the largest shareholder in the current company the French billionaire Patrick Drahi, who owns 12.1% through his company Altice. That was picked up in the summer and the limitation on his buying more – he too denied an intention to bid and his 6-month limit runs out on Dec 11 – is soon to end.
So why might BT be in play? There’s that vast pension fund with the deficit, very much a so-so performance over the years, so why buy-in? The stranglehold on the broadband infrastructure – the fibreoptic backbone – produces steady and safe enough earnings. That’s the clue here.
More generally we expect inflation to rise in the coming years. What a utility like the broadband backbone can charge would be expected to rise with that inflation. We also have the current ultra-low interest rates caused by QE and policy – we expect those to rise in the near future too. So, buying an inflation-protected revenue stream with the current cheap money – and fixing the borrowing rate on that finance – becomes an attractive play for a financial speculator.
There does need to be the more general ability to run a telecoms company but Reliance, Altice, and a number of others all have that too.
None of this means that a bid will arrive, nor that one will not. Rather, it does mean that BT is a potentially attractive target for a number of major players in this market. The market more generally is agreeing with this possibility – that’s what made the price jump so much off the back of that one single newspaper report.
It’s that set of beliefs which makes the BT price volatile – and volatility is the trader’s friend of course. Tracking the gossip and rumours of who might bid and who definitely won’t and so on will be a guide to significant movements in that stock price. It’s not even important as to whether a bid does arrive or not. Simply the speculation about whether one will is going to be a significant influence upon the near-term share price.
It’s also true that if an offer does arrive then we can expect a bidding war over the company. But that’s a different and later story.
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