By Kate Holton and Paul Sandle
LONDON (Reuters) - Britain's biggest telecoms group BT has bowed to industry and regulatory pressure and agreed to legally separate its national network, as the government seeks to deliver faster broadband speeds for millions.
After a bitter two-year regulatory battle, the former state monopoly struck a deal that avoids a full breakup, providing greater clarity for BT investors. It comes just days after the group struck a multi-year deal to retain key sports rights and named a new chairman.
The agreement also paves the way for BT and rivals including Sky, TalkTalk and Vodafone (LON:VOD) to invest more in the national network, Openreach, which determines mobile and fixed-line speeds and is key to Britain's economic growth as the country gears up to leave the European Union.
Under the agreement with regulator Ofcom, announced on Friday, BT said it will transfer 32,000 staff into a new legally separate company which will report to an independent board responsible for setting its strategy and operations.
"A giant shadow has been removed from our business, our staff, our pensioners and our investors," BT Chief Executive Gavin Patterson said.
BT shares rose 4 percent as analysts and BT's rivals welcomed the move and urged BT to press ahead with the changes.
Ofcom Chief Executive Sharon White told Reuters she had not expected the standoff to be resolved so quickly, but the path was now clear for a reformed Openreach, and the country's smaller providers, to improve Britain's infrastructure.
"I hope and expect that we will see some co-investment," she said of the different providers. "This gives us the best possible chance of improving broadband more quickly."
In a bid to boost Britain's economy through Brexit, Prime Minister Theresa May's government has said it wants to address business concerns and replace an ageing copper network with the "gold standard" common across Asia and parts of Europe.
The speeds Britons currently receive for fixed-line services are largely in line with European peers, but the country ranks 27th out of 28 in Europe when it comes to connecting fibre to the home or business, the technology that will deliver ultra fast speeds in the future.
BT has spent the last two years battling criticism from rivals and politicians, who accused it of not investing enough in the network and running it to serve BT's bottom line rather than the interests of Britain's broadband needs.
FUNDAMENTAL CHANGE
One of the challenges facing the company was its pension deficit, valued at 9.2 billion pounds net of tax at the end of 2016, which limited BT's ability to spin off assets.
Ofcom said the reforms should be in place this year but would require the government to extend to the new company the crown guarantee that protects the former state monopoly's pension scheme.
Crucially, the BT Group (LON:BT) will retain ownership of Openreach's network, which is required to underpin the pension scheme, one of the biggest in Britain.
Analysts said BT had avoided a tougher settlement, where it had to completely spin off Openreach and increase its investment levels in fibre. Bernstein analysts said any resolution was better than no resolution.
"This phrase reflects the sentiment echoed by most investors skirting around BT's stock over the last 15 months and deeming it to be "uninvestible", they said, adding that "we consider (the agreement) to be a good and entirely acceptable outcome for BT shareholders".
Ofcom hopes that the creation of a more independent network will improve transparency around how Openreach is run, and encourage the management team to invest for the long-term good of the country.
The regulator, which had threatened to go to the European Commission to try to force its case, will monitor how the new Openreach performs.
BT said Openreach's board would set the medium term and annual operating plans and determine which technologies were deployed, within a strategic and financial framework defined by BT. Openreach will also be free to explore alternative co-investment models in private with third parties.
Ofcom said on Friday that the proposals put forward by BT meant it would no longer need to impose these changes through regulation.