Billionaire Drahi checks into FTSE’s Hotel California

Comment

The UK has been at pains to stress that it would not be arbitrary or political to apply new rules to control foreign investment. This week’s decision to review billionaire Patrick Drahi’s increased stake in BT Group Plc makes that message much harder to get across.

When Drahi’s purchase of an initial 12% stake in the former state telecommunications monopoly emerged last June, the government let it slide. But the revelation in December that the contractor’s stake had risen to 18% prompted Whitehall to say he would not hesitate to act “if necessary to protect our critical national telecommunications infrastructure”.

Now he is officially reviewing Drahi’s second purchase. Doing it five months later, with no obvious trigger, is the kind of headache that creates a feeling of whimsy. This is precisely what the UK is trying to avoid by portraying Brexit Britain as open to international investment, at least as long as it is friendly and consistent in its approach.

Real security issues are at stake. BT is indeed a critical infrastructure. But it’s not like China’s purchase of semiconductor company Newport Wafer Fab, which is also under similar investigation. The immediate question here is whether it matters that BT is no longer owned by disparate international investment institutions, none of which have control, so that the trader – who has French, Israeli, Moroccan nationality and Portuguese – becomes an increasingly influential shareholder.

A lock on ownership should find compelling reasons why a minority stake of this size is problematic when owned by Drahi. After all, its stake is still below the 30% threshold considered by the UK Takeover Panel to confer effective control. While significant shareholder influence is recognized at lower levels in some corners of finance, there is no explicit barrier in the new national security regulations below Drahi’s current level of ownership.

As for the timing, Drahi’s commitment not to launch an unsolicited takeover bid ends in June. If it’s the pilot, it’s strange to act preemptively: he still hasn’t made a bid for the whole company, and maybe not. This leaves the possibility of new information being revealed that completely changes the calculus.

If there are real objections, there should be remedies. The hardest part would be a forced sale of all or part of the stake. Alternatively, Drahi could pledge to remain passive. Whatever its ambitions, its investment probably still makes sense as a financial holding company. He amassed his BT stock with the share price in the dumps because the industry spends money on broadband networks rather than giving it to shareholders. With his experience in building the French telecom empire Altice NV, Drahi will have a longer term vision.

At BT, capital expenditure demands will fall sharply once its infrastructure is upgraded, around 2026. The pension deficit is also being gradually closed. It is plausible that investors will place a much higher value on the company once dividends increase.

Suppose, however, that the government has no concerns. This could effectively give the green light to a full takeover. The fall in BT shares on Thursday suggests investors see more chances of Drahi being blocked than eliminated.

Drahi could end up joining what looks like a FTSE 100 Hotel California investor club with substantial capital tied up in UK businesses and no guarantees that they will have or want full control. Do you remember the participation of Aluminum Corp. of China in the miner Rio Tinto Plc, acquired during the financial crisis? More recently, billionaire Daniel Kretinsky jumped into grocer J Sainsbury Plc, while Abu Dhabi’s Emirates Investment Authority took 10% of Vodafone Group Plc through its telecommunications business.

The situation is probably not too bad for these companies or for the UK stock market as a whole. Only a few of the members of this group have a large enough stake to block trades or strategic moves. Some of the stakes reflect business ties, others show faith in companies unloved by the wider market. This is more of a problem for strategic owners. Buying a big stake is much easier than selling it quickly if you change your mind. You can check: leaving is another matter.

But these are longer term questions. At present, overseas bidders for UK assets are likely to hear a singular message from BT’s intervention: back off.

More from Bloomberg Opinion:

• Sotheby’s prepares well for billionaire Drahi: Chris Hughes

• Billionaire Drahi tackles bruised British icon: Alex Webb

• Have the British Conservatives been in power for too long? : Martin Ivens

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering the deals. Previously, he worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.

More stories like this are available at bloomberg.com/opinion

Nicholas E. Crittendon