After a terrible run over the last six months, the BT (LSE: BT-A) share price has jumped today. As I write, shares in the FTSE 100 telecommunications giant are up about 8%.
So, why has BT’s share price suddenly spiked? And is it time to buy the stock?
Takeover talk
Over the weekend, Sky News published an article in which it said the board of BT Group is preparing to defend itself against takeover approaches from industry rivals and buyout firms. According to the report, BT has recently asked bankers at Goldman Sachs to update its bid defence strategy.
The move comes in the wake of BT’s falling share price which, as of market close on Friday, was down nearly 50% for the year. That share price decline had reduced the company’s market capitalisation to just £10bn. According to Sky, BT has asked the investment bank to factor in a bid in the region of £15bn, which implies a significant takeover premium.
The report mentioned two potential buyers for BT. According to its sources, a number of private equity firms have begun exploring the possibility of a joint bid for BT. German telecommunications giant Deutsche Telekom was also mentioned, as it already holds a 12% stake in BT. However, Sky made it clear that BT has not yet received a formal approach from any potential suitor.
Is it time to buy BT shares?
The fact BT has updated its bid defence strategy is certainly an interesting development. However, I wouldn’t rush out to buy its shares on the back of this takeover talk. I say this for a few reasons.
Firstly, there’s no guarantee we’ll see a takeover any time soon. Sure, BT’s market capitalisation is very low after the recent share price fall. But this is a company that comes with serious baggage. For example, there’s a huge amount of debt on the balance sheet. There’s also a gigantic pension deficit.
Secondly, BT’s role in critical national infrastructure networks means any takeover would require government approval. And there’s no guarantee that a deal would be approved by the UK government. As Sky says, a takeover could be “politically explosive.”
Third, let’s not forget that this is a company experiencing serious challenges right now. On top of its balance sheet problems, the company is also struggling for growth. In recent years, revenues have declined and analysts don’t expect a rebound any time soon.
Moreover, the company recently cut its dividend. Back in May, BT announced it was suspending both its final 2019–20 dividend and all dividends for 2020–21. That says something about the challenges the company is facing right now.
So, while there’s a chance that BT could be taken over, I wouldn’t buy the stock on the back of this speculation. If a takeover doesn’t happen, you’ll be left holding a struggling company.
In my view, you’re much better off investing in high-quality businesses that are financially sound, resilient, and have strong long-term growth prospects.