FIXED-LINE telecoms is BT’s business. Is it also stuck?

BT is one of the few incumbent telecoms operators without a mobile network to spice up the revenue line and give open-ended hope for earnings growth. It has some mobile revenues from the service it offers by renting capacity from Vodafone. But this may never be enough to give BT genuine mobile telephony credentials.

The paucity of prospects in fixed is thrust into stark relief by the observation that O2 is being bought by Telefónica of Spain for roughly the same amount that BT is now worth. On demerger four years ago the company that nestled in BT’s skirts as Cellnet was worth a quarter of its parent. Hindsight vests the observations with unreasonable perspicacity but judgments about the wisdom of the move can be harshly made. And it cannot be denied that mobile telecoms is more attractive than fixed and that BT is bereft without a captive mobile operation.

The strategic thinking exhibited by BT more recently adds to concerns that the company is stuck in an ugly rut. Pierre Danon, the former chief executive, was not the only one thought to believe that the wholesale and retail parts of the BT business should be separated. Now the regulators have ruled that a division is unnecessary, BT reckons the matter is closed. But the regulators’ job is to ensure that markets are suitably competitive. They are not responsible for ensuring that client companies thrive. Division may provide the best solution irrespective of regulatory imperatives.

BT’s decision to retain the wholesale and retail operations under the same roof may be a sensible one. If the wholesale side loses its biggest customer, large chunks of shareholder value could be lopped off the aggregate value of the companies. But BT’s strategy smacks of protectionism and protectionists usually only delay, rather than permanently obstruct, prevailing forces of change. It also suggests weakness and while defence may be the sensible option for BT to follow, it hardly creates a comforting investment backdrop.

BT’s so-called new wave businesses are stronger but they, too, may benefit from being given an independent lease of life. There are early signs that the company is already losing some of its grip on the emerging broadband opportunity.

The near 6 per cent dividend yield, meanwhile, is less an indicator of generosity and more of investor nervousness. Sell.

Punch Taverns

THE past year has been a busy one for Punch Taverns. It has made two chunky acquisitions, undertaken two refinancings, completed two disposals, refurbished or redeveloped 936 pubs and secured new licences for about 6,000 of its tenants and lessees. During that time it lifted its pre-tax profits by 28 per cent, its operating profits before depreciation and amortisation charges by 21 per cent and like-for-like sales by 2.5 per cent. And despite forking out £432 million (net of disposals) buying InnSpired Group and Avebury Taverns, its cashflow was strong enough to enable it to lift the total dividend for the year by 26 per cent.

This performance was rewarded yesterday with a 17p fall in the shares to 746p, as the market reacted to concerns that Giles Thorley, Punch’s energetic chief executive, may soon have an even busier year on his hands if his mooted £3 billion bid for Spirit Group is successful. The worry is that without a partner it will be lumbered with having to run one of Britain’s biggest managed pub operators until such time as it has auctioned off the pubs it does not want. Converting the 800 or so pubs it does want to tenancies is also not without its challenges.

But even if Punch does land Spirit — the current betting seems to favour Robert Tchenguiz — Mr Thorley’s record of handling complex financial and operational issues should provide investors with comfort that he is not about to gamble away the family silver.

Meanwhile, if Spirit eludes his grasp other acquisitions will come along. But even without any significant deals there is plenty of momentum in the business. Cutting poorer pubs from the bottom end and adding good pubs at the top end is producing strong organic growth, while individual pub refurbishments are producing returns of about 30 per cent.

Anti-smoking legislation is likely to cause some uncertainty until the full impact is known but other licensing reforms — including opening hour extensions — will provide a boost in trading, helping both sales and margins. Yet shares trade on a p/e ratio of less than 11. Buy.

Invensys

ONE of the remarkable things about Invensys is that it is still around. The weakling offspring of the 1997 marriage of BTR and Siebe could have sunk under the weight of debt, pension liabilities, confused management and tough trading conditions. It is more remarkable to see that now, with equity tottering around penny share country, the company’s market value is £750 million.

Without a dividend, or the realistic prospect of one for three years, the shares may continue to swing with alarming volatility. The pension liabilities and still high debt undermine the attractiveness of the shares.

The bonds, however, deserve investigation. There is about the same amount of debt as equity floating around and results posted yesterday suggest Invensys’s financial and trading position has stabilised. Bondholders can therefore be relatively confident that they will see their interest payments made and the company will honour its debt repayment obligations. The bonds trade at just below par with coupons in the region of 8 per cent. Hold them.

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