By divesting in India, BT is robbing Peter to pay Paul
The news that BT is considering the sale of its 31 per cent holding in Indian software services provider Tech Mahindra is sure to generate a flurry of interest from would-be bidders.
Especially as private equity firms are struggling to deploy funds in India. But the fact that its stake is sure to be snapped up quickly begs the question of why it is divesting such a hot asset.
Tight Lipped
Although BT is staying tight-lipped on its intentions, sources close to the deal say that the firm is selling its Tech Mahindra stake because it thinks that it isn’t a good strategic investment. It points to the fact that Tech Mahindra provides offshoring services to telecoms firms – often ones which are in direct competition with BT itself. But others think that the company is selling the asset to shore up its balance sheet.
In a note to investors yesterday, JP Morgan said that BT was facing significant cash flow risks while last month’s first quarter results showed a pension deficit of £600m at the end of June, compared to a surplus of £2bn at the end of March. The telecoms giant could expect to pull in around £370m from the sale of its Tech Mahindra stake if it is sold at current market value.
Robbing Peter to pay Paul
But if BT is divesting in Tech Mahindra to solve its cash flow and pension problems, it is robbing Peter to pay Paul. It’s worth remembering that investors were just as concerned about weakening margins at the company’s global services division, which provides business solutions to corporate clients. The core earnings margin of 9.5 per cent in this arm of the company – which now provides about a third of BT’s revenues – fell well short of its internal 15 per cent target.
The margins at global services wouldn’t be so bad, but BT has repeatedly said that this is the division where its future lies. The company recognises that revenues from its fixed-line retail business will continue to fall, especially with the surge in mobile internet. Ofcom is also forcing it to sell its copper lines to competitors at what BT says are artificially low prices.
Improving Margins
If the company is going to improve margins in its global services business, it should be moving more activities to India, not divesting there. Its biggest competitors in IT services – like IBM and Accenture – are all embracing offshore services in a way that BT has so far failed to and it’s one of the main reasons that they have a competitive edge.
BT isn’t normally one for playing for the short term. When it said it was slashing its dividend payment to fund a £1.5bn investment in fast fibre cabling, it knew that some would get jittery, but it also recognised that it had to invest in the future.
If it were applying the same rules to this situation, it would think again before selling its stake in Tech Mahindra.