Billionaire Drahi Checks into the FTSE’s Hotel California

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The UK has been at pains to stress it won’t be arbitrary or political in applying new rules for scrutinizing foreign investments. This week’s decision to review billionaire Patrick Drahi’s increased holding in BT Group Plc makes that message a lot harder to land.

When Drahi’s purchase of an initial 12% stake in the former state-owned telecoms monopoly emerged last June, the government let it pass. But the revelation in December that the entrepreneur’s holding had risen to 18% prompted Whitehall to say it wouldn’t hesitate to act “if required to protect our critical national telecoms infrastructure.”

Now, it’s formally reviewing Drahi’s second purchase. Doing so five months on, with no obvious trigger, is the kind of headscratcher that creates the impression of capriciousness. That’s precisely what the UK is trying to avoid as it casts Brexit Britain as open to international investment, at least so long as it’s friendly, and consistent in its approach.

There are genuine security issues at stake. BT is indeed critical infrastructure. But this is not like the China-led purchase of semiconductor company Newport Wafer Fab, which is also subject to a similar probe. The immediate question here is whether it matters that BT is moving from being owned by disparate international investment institutions, none of which have control, to having the dealmaker — who has French, Israeli, Moroccan and Portuguese citizenship — emerge as an increasingly influential shareholder.

A block on ownership would have to find convincing reasons why a minority holding of this size is problematic when it belongs to Drahi. After all, his stake is still below the 30% threshold deemed by the UK Takeover Panel to confer effective control. While significant shareholder influence is recognized at lower levels in some corners of finance, there’s no explicit hurdle in the new national-security rulebook below Drahi’s current stake level.

As for timing, Drahi’s commitment not to launch an unsolicited takeover offer ends in June. If that’s the driver, it’s strange to be acting preemptively: He has still not made a bid for the whole company, and may not. That leaves the possibility that new information has come to light that changes the calculus altogether. 

If there are real objections, there would have to be remedies. The toughest would be a forced sale of all or part of the stake. Alternatively, Drahi could pledge to stay passive. Whatever his ambitions, his investment probably still makes sense as a financial holding. He amassed his BT stock with the share price in the dumps because the industry is spending cash on high-speed broadband networks rather than giving it to shareholders. With his experience in building up French telecoms empire Altice NV, Drahi will have a longer-term view.

At BT, the capital expenditure demands will drop sharply once its infrastructure is upgraded, around 2026. The pension deficit is also gradually being paid down. There’s a plausible case that investors will put a much higher value on the company once dividends ramp up.

Suppose, though, the government has no concerns. That could effectively greenlight a full takeover. BT’s falling shares on Thursday suggest investors see more chance of Drahi being blocked than cleared. 

Drahi could end up joining what looks like a FTSE 100 Hotel California club of investors with substantial capital tied up in UK companies and no guarantee they will either have or want a shot at full control. Remember Aluminum Corp. of China’s stake in miner Rio Tinto Plc, acquired in the financial crisis? More recently, billionaire Daniel Kretinsky has jumped into grocer J Sainsbury Plc, while Abu Dhabi’s Emirates Investment Authority has taken 10% of Vodafone Group Plc via its telecoms business.

The situation is probably not too bad for these firms or the UK stock market as a whole. Only a few of the members of this group have a shareholding big enough to block deals or strategic moves. Some of the stakes reflect commercial ties, some show faith in companies unloved by the wider market. It’s more a problem for the strategic owners. Buying a chunky stake is a lot easier than selling it in a hurry if you change your mind. You can check out: leaving’s another matter.

But those are longer-term questions. Right now, foreign bidders for UK assets are likely to hear a singular message from the BT intervention: Back off.

More From Bloomberg Opinion:

• Sotheby’s Is Shaping Up Fine for Billionaire Drahi: Chris Hughes

• Billionaire Drahi Takes On Bruised British Icon: Alex Webb

• Have Britain’s Tories Been in Power Too Long?: Martin Ivens

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

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

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