Competition probe weighs on BT shares

Shares in BT have stumbled since its joint venture with Warner Bros Discovery was referred to the Competition and Markets Authority. The shares are down 7% since the competition watchdog revealed on 31st May that it is probing the tie-up with the American company.

Last month, the UK’s biggest mobile and broadband supplier announced it was joining forces with Warner Bros Discovery in a premium sports joint venture for Britain and Ireland. As part of the deal, the operating business of BT Sport transfers to Warner Bros Discovery.

The joint venture combines the sports content offering of BT Sport and Eurosport UK and includes rights to the UEFA Champions League, UEFA Europa League, the Premier League, Premiership Rugby, UFC, the Olympic Games, tennis Grand Slams and the Tour de France, among other major sporting events.

BT TV customers will also receive discovery+. Both brands will initially remain separate but will eventually combine under one brand.

Competition probe was 'anticipated'

As part of the deal, BT receives £93 million from Warner in three-year instalments and an earn-out fee of up to £540 million. It also retains a 50% stake in the venture.

Warner Bros Discovery receives a call option over BT’s interest in the joint venture at a price to be set at the time. If, however, Warner doesn’t exercise the option, BT can exit its stake via a sale or IPO.

“As a global sports and entertainment broadcaster Warner Bros. Discovery is the perfect partner to work with us to take BT Sport to the next stage of its growth,” Marc Allera, CEO of BT’s Consumer division, told investors.

“We’re excited to be joining forces to bring the best of BT Sport together with Eurosport UK to create a fantastic new sports offer alongside all the entertainment that discovery+ has to offer BT customers.”

Warner Bros Discovery noted that the competition watchdog’s probe was anticipated, however. “Our recent announcement with BT Group referenced that the transaction is subject to customary closing conditions, including approvals by the relevant regulatory bodies,” the company said. “As such, this is a normal step in the process.”

The company was formed from the spin-off of Warner Media from US telecoms giant AT&T and its $43 million merger with Discovery, with the deal finalised in April this year.

The deadline for the CMA’s Phase 1 decision on whether the tie-up between BT and the US giant will reduce the amount of competition in the market is 28th July.

BT shares have recession-proof qualities

BT unveiled the new deal at the company’s full-year results in May. Full-year revenues fell by 2% to £20.9 billion, however, pre-tax profits increased by 9% to £2 billion and BT was bullish on outlook.

The company’s cost savings target has been hiked to £2.5 billion by 2024 from the previous £2 billion by 2023, with £1.5 billion already achieved.

While chief executive Philip Jansen admitted the “economic outlook remains challenging,” he confirmed BT’s earnings outlook for 2023 at earnings before interest, tax, depreciation and amortisation (EBITDA) of “at least £7.9 billion” and the reinstatement of the full-year dividend of 7.7p.

The company enjoys strong pricing power with customers despite fears of a recession.

Trading at 176.7p, BT shares are up 32% since November last year and analysts at JP Morgan Chase currently have a 270p price target on the shares. Given BT's recession-proof qualities, the share price dip could offer a buying opportunity.