BT Group, the largest British phone company, said Tuesday that it would suspend a share buyback program to triple its spending on fiber optic lines for high-speed Internet services. BT said it would stop buying back its stock July 31 to help pay for the £1.5 billion, or $3 billion, investment in a service that would be available in as many as 10 million homes by 2012.
The board decided to halt stock repurchases “given the strategic priority of this planned investment,” BT said. By the end of the month, it will have spent £1.8 billion of the planned £2.5 billion buyback program, it said. Virgin Media, the cable television operator, already uses fiber optic cables, which are faster than BT’s copper lines. Other BT competitors, among them Carphone Warehouse Group and British Sky Broadcasting, are switching clients to their own networks so they do not have to rent copper lines from BT.
“BT has just worked out that its network cannot compete adequately against cable,” analysts at the brokerage firm Execution said in a note to clients Tuesday. Investors should now “expect £1.5 billion of their money going into broadband - probably one of the most competitive consumer spaces of late.”
BT remains committed to its dividend and plans to increase the payout this fiscal year, which ends in March, the company said.
“Fiber allows us to stay ahead of the competition and stay ahead of the game,” the company’s chief financial officer, Hanif Lalani, said. He said the company was suspending the buyback because fiber would “deliver better returns.”
The expansion of fiber optic lines will help the company meet demand for services like downloading movies and playing video games, BT said. Virgin Media said that “BT’s announcement endorses Virgin Media’s long-held view that superfast broadband is what people want.”
Britain has one of the most competitive broadband markets in the world. But politicians and regulators had started to voice concerns that Britain would be left behind other countries already investing in faster networks. The huge popularity of sites like YouTube, Facebook and the BBC catch-up service iPlayer had also started to raise fears that networks would struggle to cope with the demand.
Virgin Media altered its strategy in November to focus on broadband and basic television rather than competing with BSkyB in the premium pay-TV market where BSkyB has an advantage. Under the plan, BT’s faster broadband will provide speeds from 40 to 100 megabytes. Virgin Media will introduce its 50 megabyte service this year.
“This could be mainly seen as a defensive investment to defend the franchise” against the deployment by Virgin, JP Morgan said in a note.
BT’s proposed spending depends on the country’s telecommunications regulator, Ofcom, creating the “right regulatory framework,” BT said.
BT already provides fiber cable to more than 120,000 businesses and has deployed more than 10 million kilometers, or 6.2 million miles, of fiber in the network.
BT said it would discuss with Ofcom “removing current barriers to investment” and making sure that investments in fiber optic earn a “fair rate of return” for shareholders.
