Spy chiefs can relax – the day of debt-fuelled deals is done

The Government’s decision to probe Patrick Drahi’s stake-building in BT on national security grounds is highly reassuring even if it was a long time coming.

The telecoms billionaire first swooped a year ago, and the National Security and Investment Act came into force in January so it’s not clear why it took business Secretary Kwasi Kwarteng so long to act.

Develop, a pledge from ministers that they would “not hesitate” to protect BT if necessary, alongside a warning that their newly acquired powers could be to block any attempted takeover, was a serious shot across the bows from a Government tended to adopt a soft “help yourself” approach to foreign takeovers and is desperate to live up to its post-Brexit “Global Britain” mantra.

The strategic importance of BT meant it was vital that the Government flexed its muscles. Drahi’s move is likely to have set off alarm bells across Westminster — and among the security services. The company is involved in cyber security and intelligence work at the highest levels, and is spearheading the rollout of fast fiber broadband across the UK, making it a key part of the national infrastructure in the digital era.

Yet, as a so-called “lock-up” period preventing Drahi from mounting a full takeover bid for Britain’s flagship telecoms operator ends on Tuesday, one suspects the review into his 18pc stake may prove to be somewhat academic.

It’s not necessarily that the French national wouldn’t like to own BT outright. In fact it may have been the grand plan all along despite a string of platitudes about holding BT’s management in “high regard” and being “fully supportive of their strategy”. Having failed to reveal his true intentions, nobody really knows what the tycoon is up to apart from Drahi and his most trusted advisers. Even the BT board is still largely in the dark.

The real issue is whether one of Europe’s most buccaneering dealmakers still possesses the financial might to launch such an audacious bid, amid the decline of his own business and a marked deterioration in the world economy.

His move was timed badly. In the 12 months since Drahi’s Altice vehicle emerged with a shock stake in BT, various problems have sprung up across a telecoms and media empire built on risky financial engineering during a decade of super-cheap money. As the cycle turns, investors are beginning to take fright at the eye-watering debts that key Altice entities have accumulated.

Weighed down with a terrifying $50bn of borrowings, shares in its American offshoot have tumbled from highs of $37 a little over a year ago to just $10 today.

Drahi is battling problems closer to home too. Last year, he bought out a minority investors in his European phone assets after a rollercoaster ride for the share price, again debt chiefly because of concerns over levels. The company had built up a €29bn debt mountain.

Altice was under heavy pressure to invest in fibre broadband and 5G wireless networks at the same time as reducing leverage and admitted that the decision to come off the stock market was prompted partly by concerns over its stretched balance sheet. By the time the take-private deal had gone through, shares in Altice Europe had roughly halved.

Analysts at Exane point to trouble elsewhere. The slump in the value of Altice USA, together with growing competition in Portugal and the decision to pull the stock market listing of Teads, an advertising technology company owned since 2017, in the States, has “stymied Altice’s ability to raise capital”, the bank claims.

Analysts at Deutsche Bank point out that current markets don’t just make a leveraged buyout of BT difficult, more crucially perhaps, they have “consequences for BT’s ability to continue to deploy full-fibre at pace”, something that will be a major concern for a Government, that made a manifesto commitment to deliver nationwide gigabit-broadband by 2025.

It’s not just Drahi that is struggling with the sudden tightening of credit markets amid spiraling inflation and rising interest rates. Dealmakers everywhere have taken a sharp intake of breath.

The new private equity owners of Morrisons are already looking at a possible break-up of the supermarket chain to raise cash to pay down borrowings, despite promising no “material sell-offs” during negotiations.

That Clayton Dubilier and Rice is reportedly considering offloading some of the food factories and fisheries that were lauded as the key differentiator between Morrisons and its main rivals suggests there is a rush to bolster the chain’s financial position before its borrowing costs increase further. The £9.8bn deal was funded with £3.4bn of equity, the rest through loans and bonds.

Questions have been raised about the sale of Boots too as some potential buyers get cold feet. Even the Issa brothers, whose appetite for leverage seemed near-limitless only a few months ago are reported to be harboring doubts about embarking on another high profile multi-billion debt-financed deal after borrowing billions of pounds to finance their takeover of Asda last year .

Elsewhere, the wheels have well and truly come off at the online car marketplace Cazoo as the cost of credit spikes. Roughly 90pc of its stock market value has been wiped out since the company listed in New York 18 months ago.

When it comes to BT, spy chiefs can rest easy — the age of the debt-fuelled dealmaker is about to come screeching to a halt.