Striking A Deal With The Regulator


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What's going on?

BT, the British telecom giant, has been under pressure from the UK telecom regulator to separate out an important part of its business. On Friday, it announced a deal with the regulator to do just that – and its stock jumped up 4%!

What does this mean?

BT provides phone and internet services to a huge portion of Britain. But it also owns Openreach, a subsidiary that manages the vast majority of Britain’s telecommunications infrastructure (i.e. the actual lines connecting you to the internet). The UK regulator has said the combination gives BT too much power in the industry, which could be harmful to consumers (see below). Investors were afraid that the regulator might force BT to separate Openreach from itself to a larger extent; but the agreed deal creates a legal separation while maintaining BT’s ultimate control over the company.

Why should I care?

For the markets: Removing the risk of a harmful deal is good for BT’s stock price.

Investors get fearful pretty much anytime there’s a risk that a regulator might lay down rules significantly affecting the operations of a company – and that risk was certainly in play in this situation. As it turns out, however, the regulator didn’t take as hard a stance as was feared – which helped push up BT’s stock price.

For you personally: What’s good for BT isn’t necessarily good for you.

Consumers generally benefit when there’s more competition in an industry because companies are more incentivized to lower prices and improve their services. If one company has too much power in an industry, it is very tempting for it to use that position to, say, significantly raise prices to increase its profits. Whether British consumers will be well-served by this agreement is up for debate.

Originally posted as part of the Finimize daily email.

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