How will the Vodafone/Three merger affect BT’s share price?

The Vodafone/Three merger could potentially have a significant impact on the BT Group. BT shares are up 21.73% so far in 2023, but down more than 20% in the last year. BT has also announced plans to cut up to 42% of its workforce by 2030, while awarding CEO Philip Jansen a £1.8m bonus.

• Vodafone/Three merger set to intensify competition in the sector.
• BT plans to cut up to 42% of jobs by 2030.
• CEO Philip Jansen is criticised for £1.8m bonus in the face of job cuts.

Last week’s news that Vodafone [VOD] and CK Hutchison’s [HK.0001] Three are set to merge is likely to intensify competition in the UK telecommunications sector, and could potentially have an impact on BT’s [BT.A] share price.

BT shares are in the black so far this year, having risen 21.73%, despite last week’s 7.21% fall, and gaining 23.38% since dropping to a 52-week low of 110.55p on 12 December 2022. But the longer-term share price performance has been disappointing for investors, with the stock down more than 20% over the past 12 months, and 37% in the last five years.

BT had already announced plans to cut up to 55,000 jobs (42% of its workforce) by 2030, largely as a result of the end of its huge fibre project, but also as more jobs become redundant due to advances in artificial intelligence and automation.

Vodafone/Three deal may threaten BT share price growth

Vodafone Group and Hong Kong’s CK Hutchison have announced a deal to combine their UK businesses. The merged entity will reach more than 99% of the UK population through its 5G network, and is set to up the ante against BT-owned EE, the UK’s biggest mobile operator.

The combined business will invest £11bn in the UK over 10 years, and the two partners anticipate annual cost and capital expenditure (capex) synergies of more than £700m within five years, reported MarketWatch. The deal is likely to be completed by the end of next year, if approved by shareholders and regulators.

The combined power of the two companies will, without doubt, pose a significant challenge to EE, and could inhibit BT’s share price growth potential over the short to medium term. BT, like Vodafone, has already been forced into huge levels of capex, while at the same time, BT’s revenue has shrunk in each of the previous five years.

Can BT engineer a successful restructure?

BT has already recognised the need to cut costs and will potentially reduce its headcount by as much as 42% over the next seven years. A branch manager of the Communication Workers Union (CWU), which represents BT employees, confirmed that many of its members are “discontent” about this, reports the Financial Times.

The union Prospect said it was “deeply concerned” by how many jobs BT was planning to cut, report TechRadar, while the CWU has said that it wishes to retain as many direct labour jobs as possible, with job cuts primarily coming from sub-contractors, as well as natural attrition.

The UK telecommunication giant’s recent results have disappointed the market and added to the pressure on BT’s share price, following successive quarters of notably high capex, coupled with weak revenue and earnings growth.

CEO Philip Jansen has admitted that it’s a “painful” period for the company, with respect to infrastructure upgrade costs, and dwindling cash reserves. However, he does paint a more positive outlook, saying that BT is “positioned for future growth and can take advantage of new opportunities”.

Jansen’s £1.8m annual bonus has unsurprisingly garnered significant attention in light of the job cuts. BT’s executive directors can double their base salary through their annual bonus, based on the company's performance – but it’s debatable whether BT’s recent performance has merited such an award, particularly at such a sensitive time. In its full-year results, announced last month, revenue declined 1% to £20.68bn, broadly in line with forecasts, while pre-tax profit fell 12% to £1.7bn.

What’s next for BT shares?

Its huge full fibre outlay should help BT attract and retain customers and boost revenue in the coming years, suggesting there could be a case to make for longer-term value in the BT share price.

The 16 analysts offering 12-month price targets for BT have a median target of 192.50p, with a high estimate of 280.00p, and a low estimate of 100.00p, according to the Financial Times. The median estimate represents a potential upside of 41.13% versus last week’s close at 136.40p. Analysts take a positive view overall on the stock, with four ‘buy’, six ‘outperform’, and seven ‘hold’ recommendations, along with just one ‘underperform’ and one ‘sell’ recommendation.