Thinking about investing in telecoms? Here’s how the Labour nationalisation plan might affect you!

Late last week, shareholders of telecoms giant BT (LSE: BT-A) received a shock when the opposition Labour party announced a plan to nationalise part of the company in order to extend full fibre broadband to every part of the UK by 2030. 

What is the proposal?

The basic idea of the proposal is for shareholders of BT to receive government bonds in exchange for their share holdings, at a valuation determined by the government. This new nationalised company would be called British Broadband, and would become responsible for rolling out this scheme.

Nationalisation hasn’t been a feature of the British economy for decades, so there is a lot of uncertainty as to how this would be implemented. A big fear among shareholders of BT is that a potential Labour government, which is perceived as being anti-big business, would have a strong incentive to undervalue BT. 

In addition to the ‘bonds for stocks’ plan, Labour have also announced that they would raise taxes on large multinational corporations, in particular tech companies like Facebook and Google. This money would go towards paying for the day-to-day upkeep of the new fibre optic network.

A big point of contention is the cost of such a plan. Labour expects to spend £20b, whereas BT leadership has stated that such an undertaking would cost up to £100b. Based on the amount of money that BT spends on this right now, it seems their numbers are closer to reality than those announced by Labour.

How does this affect the industry?

This proposal extends beyond the immediate concerns of BT shareholders. Other telecoms companies in the UK may be wondering what role they would have to play in this post-nationalisation world. Currently, companies like Virgin Media are implementing their own schemes to extend broadband access across the country. 

It is unknown what their fate would be – presumably a Labour government intent on using the power of the state to expand connectivity would not be too excited about the prospect of competition from the private sector, both because it could potentially undercut the government, and also because it would be viewed as wasteful from an efficiency standpoint.

Even if they manage to escape nationalisation, the uncertainty makes it difficult for management to commit capital to such expensive projects. 

Verdict

Of course, all of this is contingent on the Labour party gaining power at the general election on 12 December. The latest polls suggest that this is not so likely, although there is still a lot of campaigning ahead, and the pollsters have been wrong in the past.

In my opinion, the main takeaway for investors is that systemic political risk is just as important a factor as business risk when it comes to building a good portfolio. Although it is important to make sure that you are buying stocks at good discounts to intrinsic value, you must always remember to keep an eye on the bigger picture as well.