BT hits six-week high after Openreach deal

It's been a better week for telecoms group BT and its army of small shareholders.

The FTSE 100 Index stock rallied 5% Friday after a voluntary settlement with Ofcom on broadband infrastructure division Openreach removed fears that BT could become embroiled in a long legal battle with the regulator.

As a result of this agreement, the business will become a distinct, legally separate company with its own board and 32,000 engineers and other staff.

The deal is still one step away from structural separation, something many of BT's rivals had been calling for. They claim that Openreach is not working on behalf of the whole industry, and had urged Ofcom to take strong action in order to encourage more investment in UK broadband infrastructure.

Today's settlement comes a few days after BT secured another three years of Champions League football. Failure to have done so would have left question marks hanging over its broadcasting strategy and would also have removed a potential marketing tool for EE, which it acquired for £12.5 billion last year.

Despite this week's positives, shares are still only back where they started when Gavin Patterson stepped up from BT Retail to take over as group chief executive in September 2013.

Having peaked at nearly 500p in the early part of last year, shares have been bruised by a 21% slide in January caused by revelations of an accounting scandal at BT Italia. Even though the division only represents about 1% of group profits, the warning has had a big impact on confidence.

However, investors who piled in at the bottom, near the 300p level, will have made a killing in just six weeks. That includes directors who between them bought 185,000 BT shares at 302p. They're currently sitting on a paper profit of around £80,000.

But should they hang on? Analysts also point to a number of other uncertainties facing the company, such as a widening pensions deficit and rising competition from Virgin Media.

But in the meantime, UBS analyst Polo Tang said the absence of negative surprises from the Openreach announcement should be taken positively.

In particular, he noted that the government is willing to extend the existing Crown Guarantee pension protection scheme to cover a new legally separate Openreach in addition to BT.

He said: "Visibility on Openreach is clearly a positive for the BT share price.

"However, we remain wary of downside risk to consensus equity free cash flow estimates from higher pension payments, rising capex and risks from increasing competition."

UBS has a 'neutral' recommendation on BT, with a 12 month price target of 325p. BT offers a 5% dividend yield.

Tang points out that the regulatory process is still not finished, with BT awaiting the outcome of Ofcom's Wholesale Local Access review that will determine whether there should be regulated pricing for fibre.

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