Shares in BT (BT.A) plunged nearly 5% in early afternoon trading on Wednesday after Virgin Media agreed a five-year deal with rival Vodafone (VOD) to run its mobile virtual network operator service.
The agreement will replace Virgin Media's current deal with BT and means Virgin Mobile services, including its 5G capability, will be hosted on the Vodafone network. The BT/Virgin deal expires in late 2021.
‘It will open up a whole new world of opportunity for Virgin Media as we focus on becoming the most recommended brand for customers and bring our mobile and broadband connectivity closer together in one package for one price’, said Virgin Media's Lutz Schuler.
The news saw investors react by sharply selling down BT shares by nearly 10p to 192.98p.
TIME TO OFFSET THE LOSS
But some analysts believe the market’s reaction is overcooked.
‘We calculate a marginal 4% free cash flow hit, but not before full year 2023 for contractual reasons’, said Jerry Dellis, an analyst at stockbroker Jefferies.
‘This gives BT plenty of time to mitigate the issue by adjusting investment plans and reduces 5G capex risk’, said Dellis.
The analyst believes that Vodafone is likely to have won the Virgin contract largely on price, offering much better terms than BT.
‘That represents a material strategic shift for Vodafone, which previously stressed the importance of not allowing MVNOs to undermine retail pricing levels’, said Dellis.
Vodafone shares rallied 1.6% to 164.6p.
