Shareholder value creation is not about making profit, increase share price or manage earning but its about long term cash flow bigger than the cost of capital and vice versa. But high return does not mean create better value instead it increase the costs of capital. To get good actual return and value creation the rate has to be >11%pa.
BT announce to invest £50m to expand their fibre broadband for their customers and will operates in more than 30 cities for the next three months or so. This is part of the company's plan to provides fast internet services for two-thirds of UK consumers.
BT already allocate £2.5bn to deploy their plan of providing better fibre broadband service to 400,000 homes and businesses in more than 30 cities. Consumers can look forward for superfast broadband connections. The group now has reached 18 million homes and businesses.
The Managing Director of Network Investment at Openreach, Mike Galvin expressed that "Our fibre programme is going extremely well, with our engineers connecting homes and businesses across the UK. "Some city areas have proved challenging in the past, but we are returning to those and will pass hundreds of thousands of additional premises."
The company has successfully required £530m funds from the government's Braodband Delivery UK programme (BDUK). The £539m funds are used to extend coverage approximately 90% of the UK by late 2015 or early year of 2016. The government will also give extra £250m so that by 2017 it will reach to 98% of premises and areas that are not covered by BT will have better internet service. Although there are no decision on how to allocate the funds in the best way even though given by critics that the first offer given to BT fully.
So example like BT, BT only focus on creating profits or shareholder's wealth by investing £50m with additional funds from the government. This is contradict to the shareholder value creation because by doing that BT cost of capital will be bigger than its long term cash flow. Thus BT attained a high return and destroyed the shareholder's value instead of creating it.
In addition, BT is in risky position because investing in a huge amoutn can bring big debts since not only the company invest but they acquired funds from the government which include additional funds. In short term outlook the plan is going well and customers can enjoy the new broadband thus giving profits to BT but if you consider the long term outlook there will be challenges and problem along the way such as technical difficulty or the price of the broadband is more expensive and customers change other product to avoid paying high prices. Also having a risky investment can attract less the investors or does not guarantee good dividend payment to the shareholders. By that, less investors will be interested in invest in BT in the future because of the uncertain financial health BT will have.
