A furore has surrounded the UK telecoms industry over the past week after regulator Ofcom effectively decided it would not force the break-up of BT (BT.A) and its UK communications backbone workhorse Openreach. The O penreach arm runs the ducts and poles that support the majority of the nation’s communications and broadband network infrastructure.

What is on the table is a solution put forward by BT itself. It promises a separate Openreach under a new governance structure with its own board of directors able to take its own decisions on budget, investment and strategy, but crucially, still part of the parent BT. Ofcom also intends to introduce tougher rules on faults, repairs and installations, transparent information on service quality, and automatic compensation for consumers when things go wrong.

Voluntary agreement

Ofcom claims that this morning’s Openreach proposals offer the greatest degree of independence from BT that is possible without incurring the costs and disruption of separating the two companies entirely, and others largely agree.

‘In many ways, a voluntary agreement between Ofcom and Openreach, which is backed by the rest of the industry, would achieve more than years in court and a forced enhanced model of separation could,’ says Matthew Howett, an analyst at independent research group Ovum.

‘Many of the things proposed by Ofcom, and that are being offered by BT, could be enacted within months. Attention and money could then turn to getting on with delivering what this review is ultimately all about - making sure Britain has the broadband infrastructure fit for the next decade.’

Others disagree, not least BT’s industry competitors. They claim that the proposals do not address Ofcom’s key objectives of reducing the country’s dependence on Openreach and encouraging essential investment in fibre. Dido Harding, CEO of calls and broadband supplier TalkTalk (TALK) has been among the leading critics, with claims of lack of transparency regarding Openreach money flows among others complaints.

She is not alone. ‘Whilst correctly identifying Openreach as the principal source of the industry’s dysfunction, it is hypocritical of Ofcom to focus on a restructured Openreach as a panacea,’ says Mark Collins, strategy and policy director at CityFibre (CITY:AIM), the AIM-listed independent attempting to build out its own alternative network infrastructure.

BT’s shares have rallied 4.5% since the Ofcom announcement on 26 July, to 404.95p, demonstrating the sigh of relief felt by its investors. Yet stripping the group of its control over Openreach is not the sole concern, or arguably even the biggest issue.

Dividend concerns

‘BT has a £10 billion pension deficit that needs to be plugged and investors are fearful that it will raid its dividend piggy bank to do so,’ cautions Neil Wilson, markets analyst at derivatives trading platform ETX Capital. ‘With bond yields at record lows, the pension deficit problem for BT, and many other firms, is not about to improve soon. Dividends may have to take a hit. And any spare cash will now almost certainly have to go into beefing up the Openreach infrastructure to placate regulators.’

Reassurance over future dividends came from BT itself on 27 July in first quarter to 30 June results. The group revealed that it expects growth in underlying revenue and EBITDA (earnings before interest, tax, depreciation and amortisation), with free cash flow (FCF) of more than £3.6 billion. It also intends to raise the dividend by around 10% both this year to 31 March 2017, and next.