BT's Openreach must legally separate but remain within group, says regulator

BT Group's infrastructure arm Openreach should be forced to become a legally distinct company with its own board, own staff and separate branding to give it independence from the larger group, a report from regular Ofcom confirmed on Tuesday.

Shares in BT rose as the results of the regulator's investigation, much of which were leaked to newspapers over the last week, were felt to be relatively benign for BT as Ofcom failed to force the former monopoly to dispose of the business, although did go further than BT's proposal for functional separation with independent governance.

Openreach contributed £5.1bn of revenue out of BT's £18.9m total in the last full year, £1.4bn out of £3.5bn operating profit and £1.4bn out of £3.1bn cash flow.

As a legally separate company within BT Group, with its own ‘articles of association’ and a majority of independent directors who are not appointed by or connected to BT, Openreach would be obliged to consult formally with customers such as Sky and TalkTalk on large-scale investments.

Ofcom, which also made a second main proposal regards opening up BT to further network led competition and said later this year it will set out stricter minimum requirements for Openreach to repair faults and install new lines more quickly, said people who work for Openreach should not be employees of BT Group as it felt this would prevent any conflicts of interest with new separate branding to help embed the organisational culture of a distinct company.

Under the new model, Openreach will take full ownership of the physical network it currently controls and have control over its own budget within an overall allocation given by BT, allowing its management to make decisions that depend on investing and maintaining its own assets, which would be likely to require mitigation for BT as it transfers assets or people to Openreach.

“We’re pressing ahead with the biggest shake-up of telecoms in a decade, to make sure the market is delivering the best possible services for people and business across the UK,” said Ofcom chief executive Sharon White.

Ofcom also made a second proposal regards opening up BT to further network led competition, with BT having so far focused on fibre-to-the-cabinet (FTTC), as the regulator wants to stimulate fibre to the premises (FTTP) investment.

It did not announce any further news, but confirmed that Sunday 31 July, new rules come into force that will give telecoms providers further rights to access physical infrastructure - measures designed to reduce the cost of deploying broadband networks, by sharing access to infrastructure across different sectors.

TalkTalk and Sky remain unhappy

Telecoms expert Dan Howdle of Cable.co.uk suggested that full separation of Openreach still could happen.

“This move is clearly the first in a multi-stage process toward severing Openreach from the BT Group completely," he said. "If permanent separation were to happen, existing staff would need to be reassigned, a new board appointed, budgets allotted, and it would need to become discreet owner of its existing infrastructural assets – all of which is exactly what is happening today."

TalkTalk chief executive Dido Harding called for a more immediate full separation of Openreach and, bemoaning the fact that Openreach would not be required to declare what dividends it paid back to BT, urged the public to complain to the regulator as consults on the plans before the 4 October deadline.

“Legal separation still means a highly complex web of regulation, and BT has proven itself expert at gaming this system," she said.

“There is nothing to suggest they will not continue to do so in the new system. Structural separation is cleaner, with less red tape. In taking one cautious step forward, I fear Ofcom may in practice have taken five steps back.”

Sky was also critical of the proposal, with CEO Jeremy Darroch saying it “falls short of the full change that would have guaranteed the world-class broadband network customers expect and the UK will need”.

Broker RBC Capital said that although Ofcom rejected and went further than BT's proposal in enforcing legal separation, "we see the outcome as benign for BT as it retains ownership of Openreach and the circa £1.4bn of cashflow (circa 45% of group) it provides".

"In our view Ofcom's move is proportionate to the issues involved - a full separation would not have been."