Equity Research Telecommunications | European Telecom Services BT Group PLC 3 May 2018 Stock Rating EQUAL WEIGHT Wholesale-Only overhang from Overweight

Industry View POSITIVE In a separate report published today, The Rise of Wholesale Only, we analyse the Unchanged impact Open Fiber is having in Italy and the extent to which it can be replicated Price Target GBp 280 elsewhere. Italy appears an ideal market for fostering alternative infrastructure lowered -20% from GBp 350 build (and increased retail competition). We note actual competitor builds to date in the UK have been few and far between, even if the narrative has been consistently Price (01-May-2018) GBp 245 noisy. However, we do see BT as potentially vulnerable, especially given the Potential Upside/Downside +14.3% increased focus of numerous infrastructure funds and regulatory direction. Tickers BT/A LN / BT.L Resolution of this overhang for BT looks unlikely, in our view. Reflecting this, we lower our medium-term forecasts, cut our PT to 280p and move BT to Equal Weight. Market Cap (GBP mn) 24591 Shares Outstanding (mn) 9921.90 Wholesale-only is not new – Why worry now? We have become accustomed to a Free Float (%) 84.31 spate of alternative FTTH build announcements in recent months from numerous 52 Wk Avg Daily Volume (mn) 22.4 players. In reality, FTTH build has been limited. However, having met recently with 52 Wk Avg Daily Value (GBP mn) 60.93 Open Fiber in Italy, we see an opportunity to make double-digit IRRs for alternative Dividend Yield (%) 6.3 build in markets like Italy/the UK/Germany. As in Italy, we believe key stakeholders in Return on Equity TTM (%) 22.10 the UK (broadband service providers, mobile network operators and Current BVPS (GBp) 82.34 Source: Thomson Reuters government/regulator) are keen to see the model succeed, increasing the likelihood of greater infrastructure competition for BT. For BT the problem of incumbency (material Price Performance Exchange-LSE copper FCF annuity value) makes it hard to find the right wholesale price, and/or 52 Week range GBP 3.18-2.16 accelerate FTTH build, as we discussed in UK Fibre - playing the long game (28 February 2018).

Valuation appears undemanding (PT to 280p, from 350p), even on lower forecasts. Our FY19 estimates are barely impacted, but FY20e EBITDA falls 1.6%, EPS by 4%. We estimate BT trades on 5.7x March 2019E EV/EBITDA, 11.0x EV/OpFCF, 8.4% equity FCF yield and offers a 7.2% dividend yield (sector on 6.2x, 12.8x, 6.6% and 5%, respectively). Our equity and EV multiples adjust for BT’s pension deficit. Link to Barclays Live for interactive charting

BT.L: Financial and Valuation Metrics EPS GBp European Telecom Services FY Mar 2016 2017 2018 2019 2020 Maurice Patrick EPS 26.8A 28.9A 28.0E 28.6E 28.3E +44 (0)20 3134 3622 [email protected] Previous EPS 26.8A 28.9A 28.0E 28.8E 29.3E Barclays, UK Consensus EPS 32.8A 28.7A 27.3E 28.2E 28.4E P/E 9.2 8.5 8.7 8.6 8.6 Mathieu Robilliard +44 203 134 3288 Source: Barclays Research. Consensus numbers are from Thomson Reuters received on 02-May-2018; 13:35 GMT [email protected] Barclays, UK

Simon Coles +44 (0)20 3555 4519 [email protected] Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with Barclays, UK companies covered in its research reports. As a result, investors should be aware that the Daniel Morris firm may have a conflict of interest that could affect the objectivity of this report. Investors +44 (0)20 7773 2113 should consider this report as only a single factor in making their investment decision. [email protected] This research report has been prepared in whole or in part by equity research analysts Barclays, UK based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 15.

Barclays | BT Group PLC

European Telecom Services Industry View: POSITIVE

BT Group PLC (BT.L) Stock Rating: EQUAL WEIGHT

Income statement (£mn) 2017A 2018E 2019E 2020E CAGR Price (01-May-2018) GBp 245 Revenue 24,082 23,878 23,648 23,515 -0.8% Price Target GBp 280 EBITDA 7,645 7,505 7,509 7,449 -0.9% Why Equal Weight? We believe improving operational EBIT 4,135 4,016 3,985 3,917 -1.8% performance and continued cost-cutting can improve Finance costs - net -803 -746 -727 -686 N/A FCF generation at BT. The pension position is also Pre-tax income 2,354 2,684 3,160 3,132 10.0% likely to have materially improved by the next review, enabling BT to increase dividends and deleveraging. Tax rate (%) 19 20 19 19 0.4%

Net income 1,908 2,051 2,518 2,496 9.4% EPS (adj) (GBp) 28.9 28.0 28.6 28.3 -0.6% Upside case GBp 405 Diluted shares (mn) 9,930 9,894 9,860 9,859 -0.2% If BT were to realise synergies higher than announced from its acquisition of EE (announced synergies are at DPS (£) 0.15 0.16 0.16 0.16 1.8% the low end compared with other European M&A

deals) we could see upside to our price target. Margin and return data Average

EBITDA margin (%) 31.7 31.4 31.8 31.7 31.7 Downside case GBp 200 EBIT margin (%) 17.2 16.8 16.9 16.7 16.9 An extended cable rollout combined with escalating Pre-tax margin (%) 9.8 11.2 13.4 13.3 11.9 content costs and increased aggression from TalkTalk Net margin (%) 7.9 8.6 10.6 10.6 9.4 represent the key downside risks to our price target. It Operating CF margin (%) 23.1 20.0 22.9 21.2 21.8 should be noted that we already assume elevated ROCE (%) 10.7 10.2 10.0 10.0 10.2 investment in Fibre. We estimate £3.1-3.3bn capex for RONTA (%) 21.0 19.4 19.6 19.2 19.8 BT (including EE) ROA (%) 7.8 7.5 7.5 7.5 7.6 ROE (%) 28.4 33.3 32.0 28.7 30.6 Upside/Downside scenarios

Cash flow and balance sheet (£mn) CAGR Cash flow from operations 6,725 5,617 6,409 6,349 -1.9% Capex and acquisitions -3,123 -3,460 -3,906 -4,662 N/A Free cash flow 2,438 1,340 1,505 322 -49.0% NOPAT 3,359 3,193 3,228 3,173 -1.9% Tangible fixed assets 16,498 16,489 16,569 16,602 0.2% Intangible fixed assets 15,029 15,029 15,029 15,029 0.0% Cash and equivalents 528 -115 -568 -2,018 N/A Total assets 42,372 42,865 42,222 40,543 -1.5% Short and long-term debt 12,713 14,979 14,679 14,579 4.7% Other long-term liabilities 2,703 1,444 1,205 -247 N/A Total liabilities 34,037 34,055 32,480 29,907 -4.2%

Net debt/(funds) 8,932 9,372 9,525 10,875 6.8% Shareholders' equity 8,335 8,810 9,742 10,636 8.5%

Valuation and leverage metrics Average P/E (adj) (x) 8.5 8.7 8.6 8.6 8.6 Prop. EV/EBITDA 5.8 6.0 5.8 5.6 5.8 Prop. EV/OpFCF 9.9 11.1 11.1 10.7 10.7 Prop. EFCF yield (%) 8.5 7.7 8.2 9.2 8.4 P/BV (x) 2.9 2.8 2.5 2.3 2.6 Dividend yield (%) 6.3 6.5 6.6 6.6 6.5 Total debt/capital (%) 60.4 63.0 60.1 57.8 60.3 Net debt/EBITDA (x) 1.2 1.2 1.3 1.5 1.3

Selected operating metrics (k) Average Total mobile subscribers - UK 23,712 23,377 23,177 22,637 23,226 Broadband lines retail - UK 9,276 9,366 9,447 9,520 9,402

Source: Company data, Barclays Research Note: FY End Mar

3 May 2018 2 Barclays | BT Group PLC

The rise of wholesale-only Our separate report this morning (The rise of the Wholesale-Only model) considers the wholesale-only business model, and makes the following key conclusions:

Feedback from meeting Open We recently met with Open Fiber, the highest-profile wholesale-only infrastructure operator Fiber in Europe with plans to build an extensive FTTH network in Italy. Our key takeaways are as follows:

 Rollout on track – set to accelerate. After initial delays on organic rollout, the company appears to be fully on track to deliver an acceleration of FTTH roll-out in the next three years; we estimate it will pass c.2.5m homes per year and reach close to 10m homes by YE2020.

 Open Fiber will rely on established third-party service providers (local broadband and mobile operators) to drive the business case. There is no retail offering. Open Fiber has secured wholesale deals with Vodafone and Wind Tre and we see a clear path to monetize these investments, as service providers are keen to migrate off the incumbent.

 Financing secured; double-digit IRR potential. On 13th April 2018 Open Fiber indicated that it had secured financing for its investment plan, removing one source of uncertainty about the project. We see a double-digit IRR potential for greenfield FTTH investments, and driving on-net penetration as the critical factor. Italy and Open Fiber appear to have ticked all the necessary boxes. Continued execution is now key.

FIGURE 1 FIGURE 2 Wholesale-Only: IRR – Flexing Cost Per Home (€) Wholesale-Only: IRR – Flexing Penetration (%)

20% 14% 18% 12% 16% 14% 10%

12% 8% 10% 8% 6% 6% 4% 4% 2% 2% 0% 0% 300 400 500 30% 40% 50%

Source: Barclays Research estimates Source: Barclays Research estimates

 Can it work in the UK? Identifying key success factors.

 Level of cable infrastructure and incumbent FTTH build. This is key to assessing the size of the market opportunity, and level of wholesale competition. The less competing infrastructure there is, in our view, the greater the opportunity for a wholesale-only provider. In the case of Italy, there is no cable, and limited FTTH build from TI.

 Having the right partners. This is key to facilitating the new fibre network build, managing political/regulatory relationships, and reducing unit cost of delivery. In the case of Italy, Enel and local municipalities are key for Open Fiber here.

3 May 2018 3 Barclays | BT Group PLC

 Having a fertile retail competitive environment with retailers very keen to support alternative infrastructure. This is key for driving high on-net penetration – A high number of potential retail partners boosts the market opportunity. In the case of Italy, Vodafone and WIND are willing resellers.

Implications for incumbents Not all markets are equal – We rank each of the key EU markets by the state of current infrastructure competition, but FTTH strategies differ also the risk of this changing/deteriorating. The UK and Germany stand out to us as markets materially. Germany/UK with clear alternative infrastructure risk, unless DT/BT accelerate FTTH build. In France, appear to us most at risk Orange does have competitive build, but the outlook is certain, with limited headwinds. Spain/Portugal have vibrant infrastructure competition already and we see limited scope for this to worsen, while risk in Belgium/the Netherlands appears very low. For EU Cable, the concept of wholesale-only clearly presents a potential risk. However, we would anticipate the majority of infrastructure competition (incumbent and alternative) is likely to focus on non-cable areas where market share opportunities clearly lie.

FIGURE 3 Assessing Wholesale-Only Opportunity

Cable Infra FTTH Fibre Disruptive Retail support Risk Stakeholders

Italy None Low Enel High High Germany High Low Local carriers Medium High UK Medium Low - High High Switzerland Medium High Utilities Low Medium France Medium Medium - Medium Low Spain Medium High - Low Low Netherlands High Medium - Low Low Belgium High Low - Low Low Portugal Medium High - Low Low Source: Barclays Research

Wholesale-only risks shifting We see ‘wholesale-only’ providers potentially shifting the risk-reward profile for FTTH risk/reward of heavy investment in Europe, principally in markets such as the UK and Germany where there is a wholesale markets heavy reliance on the incumbent for wholesale access, and a lack of existing FTTH infrastructure. It is here where incumbents such as BT/DT have struggled to make the FTTH business case work, largely because they assess the FTTH investment against the value of the copper revenue annuity in a way that wholesale-only does not have to. As such, an acceleration of FTTH investment looks to us all but inevitable, but expectations of ‘incremental returns’ for FTTH investments are unlikely to be realised, in our view. However, not investing, while having a limited impact on near-term FCF, runs the risk of ceding market share (and value). We would not expect material EU cable overbuild, as this would clearly reduce the wholesale market opportunity.

Is there a way out (other than Is separation the answer? In our accompanying sector note, we look at examples of Ireland accelerating FTTH build)? (where the incumbent lost out in the government’s FTTH bid), and also New Zealand, where there is clear FTTH build post structural separation, although value creation has yet to occur, with unintended consequences (accelerated hard fixed-mobile substitution); indeed, in this context, we note that Chorus trades on 6x Bloomberg consensus EV/EBITDA (April 2018), a material discount to other utility-like peers. Rising incumbent FTTH investment appears all but inevitable, in our view – as does wholesale risk.

3 May 2018 4 Barclays | BT Group PLC

FIGURE 4 European Telcos: Incumbent FTTH rollout (% of HHs covered)

90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E TEF ORA BT DT TI PROX KPN

Source: Company data, Barclays Research estimates

From a BT perspective, we note that rollouts to date have been few and far between, but new ownership of CityFibre should change this. Not only does wholesale-only threaten to undermine longer-term Openreach returns (as service providers migrate traffic onto alternative providers), it also opens up new competition and risks lower retail pricing, especially if the wholesale pricing is attractive relative to retail. Given headline UK retail broadband tariffs of £30-40/month+, BT Consumer ARPU of £41 (has risen +5%/year for past few years) and with FTTH wholesale rates of c£13-15/month, we find it hard to envisage a FTTH fibre retail premium (Italy/France already seeing this trend). On top of this, BT might have to accelerate FTTH investments without broad regulator/service provider support. As we highlighted in UK Fibre - playing the long game (28 February 2018). Openreach has yet to gather wide industry support for its FTTH rollout. We believe that Ofcom is unwilling to change its current stance of enabling alternative infrastructure build, and that retail service providers (e.g. TalkTalk, Vodafone – and even Virgin Media for its off- net) are in no hurry to sign long-term deals with Openreach, unless the wholesale price is attractive (note the recently reduced 40mbps wholesale VDSL price places further pressure on potential wholesale ARPU upside, as resellers have an alternative to full fibre). Openreach has indicated a ‘value’ premium of c£7/month for FTTH in a cutover model scenario, on top of the c£11-13/month already charged. Some of the £7/month could be lower opex (i.e. this implies a wholesale price of at least £15/month, and possibly more). Openreach has 25m lines – each £1/month is £300m/year of EBITDA.

The following is a sensitivity of BT’s profitability to these factors, which we have to some extent reflected in our forecasts.

 Wholesale loss. If we assume there are 10m homes in the UK that see alternative FTTH build, and see Openreach losing 50% in-footprint market share, based upon an Openreach wholesale ARPU of £11/month, this implies a c£650m revenue headwind, or c£450m of EBITDA assuming a 70% gross margin. This is c20% of Openreach EBITDA (This is c30% of current consumer-related Openreach EBITDA). As an aside, from the Openreach perspective, a greater loss of wholesale customers would be compensated near term by higher fees for remaining customers on copper – we would see this as unsustainable, however.

 Retail risk – Market share and ARPU. Losing 5pp of market share in this area is worth c£75m of EBITDA, whereas each £1/month of Consumer ARPU (4%) across the UK as a

3 May 2018 5 Barclays | BT Group PLC

whole is worth c£120m EBITDA, on our estimates. So £200m in total. In aggregate (wholesale plus retail), we see c10% of EBITDA at risk.

Forecasts Reflecting increased conservatism on the back of the analysis in this note and our accompanying sector report, we make a number of changes to our forecasts. First of all, we incorporate higher spectrum costs than previously assumed (£300m for FY19e vs £150m before, and £1.1bn for FY20e vs £1bn before). We also reduce Consumer broadband net adds and assume flat ARPU (cuts FY20e Consumer EBITDA £40m/4%). Openreach reductions are from FY22e onwards. We moderate our assumed EE growth, assuming greater convergent discounting. The net effect is that our FY19 estimates are barely impacted, but FY20e EBITDA falls 1.6%, EPS by 4%.

FIGURE 5 BT: Changes to estimates (£m)

BT: Changes to Estimates New Old Change (%) Year to March 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E Revenues 23,878 23,648 23,515 23,878 23,760 23,974 -0.0 -0.5 -1.9 EBITDA 7,505 7,509 7,449 7,505 7,536 7,571 -0.0 -0.4 -1.6 Depreciation 3,489 3,523 3,532 3,489 3,524 3,537 -0.0 -0.0 -0.1 Total operating profit 4,016 3,985 3,917 4,016 4,012 4,034 -0.0 -0.7 -2.9 Underlying PBT 3,488 3,478 3,450 3,488 3,504 3,568 -0.0 -0.7 -3.3 Profit attributable to shareholders 2,051 2,518 2,496 2,051 2,539 2,591 -0.0 -0.8 -3.7 EPS pre pensions and specific items 28.0 28.6 28.3 28.0 28.8 29.3 0.0 -0.7 -3.3 EPS after specific items 20.7 25.5 25.3 20.7 25.8 26.3 0.0 -0.8 -3.7 DPS 15.9 16.1 16.2 15.9 16.1 16.2 0.0 0.0 0.0 Capex 3,448 3,604 3,565 3,448 3,614 3,614 -0.0 -0.3 -1.3 Free cash flow (reported) 1,340 1,505 322 1,340 1,676 518 -0.0 -10.2 -37.8 Free Cashflow (BT definition) 2,798 2,717 2,332 2,798 2,734 2,401 -0.0 -0.6 -2.9 Net debt 9,372 9,525 10,875 9,372 9,424 10,649 -0.0 1.1 2.1 Source: Company reports, Barclays Research estimates

3 May 2018 6 Barclays | BT Group PLC

FIGURE 6 BT: Revenues (£m)

Revenues FY16 FY17 FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E Global Services 5,124 5,479 5,131 5,086 5,017 4,964 4,923 4,891 4,866 4,847 Business 5,022 4,758 4,572 4,508 4,420 4,353 4,302 4,263 4,232 4,208 Consumer 4,608 4,934 5,063 4,964 4,949 4,926 4,897 4,871 4,847 4,826 EE 5,062 5,090 5,285 5,450 5,519 5,542 5,580 5,613 5,641 5,667 Wholesale 2,207 2,109 2,032 2,000 1,961 1,922 1,885 1,849 1,814 1,780 Openreach 5,100 5,098 5,109 4,854 4,766 4,794 4,830 4,865 4,900 4,936 Eliminations -3,442 -3,396 -3,326 -3,227 -3,128 -3,094 -3,065 -3,034 -3,002 -2,970 Total 23,692 24,082 23,878 23,648 23,515 23,419 23,364 23,330 23,311 23,306

Annual Growth (%) Global Services -2.8 6.9 -6.4 -0.9 -1.4 -1.1 -0.8 -0.6 -0.5 -0.4 Business -1.3 -5.3 -3.9 -1.4 -2.0 -1.5 -1.2 -0.9 -0.7 -0.6 Consumer 7.3 7.1 2.6 -1.9 -0.3 -0.5 -0.6 -0.5 -0.5 -0.4 EE -2.2 0.6 3.8 3.1 1.3 0.4 0.7 0.6 0.5 0.5 Wholesale -3.4 -4.4 -3.7 -1.6 -2.0 -2.0 -1.9 -1.9 -1.9 -1.9 Openreach 1.8 -0.0 0.2 -5.0 -1.8 0.6 0.8 0.7 0.7 0.7 Eliminations -0.6 -1.3 -2.1 -3.0 -3.1 -1.1 -0.9 -1.0 -1.0 -1.1 Total 0.1 1.6 -0.8 -1.0 -0.6 -0.4 -0.2 -0.1 -0.1 -0.0 Source: Company reports, Barclays Research estimates

3 May 2018 7 Barclays | BT Group PLC

FIGURE 7 BT: EBITDA (£m)

EBITDA FY16 FY17 FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E EBITDA Global Services 502 495 467 501 494 489 485 482 479 477 Business 1,693 1,528 1,429 1,430 1,402 1,381 1,365 1,352 1,342 1,335 Consumer 1,063 1,012 1,024 1,015 1,029 1,049 1,043 1,037 1,032 1,028 EE 1,086 1,156 1,320 1,416 1,435 1,496 1,562 1,572 1,580 1,587 Wholesale 883 834 751 739 725 711 697 683 670 658 Openreach 2,670 2,633 2,529 2,403 2,359 2,373 2,396 2,418 2,441 2,464 Other -71 -13 -15 5 5 5 5 5 5 5 Total 7,826 7,645 7,505 7,509 7,449 7,504 7,552 7,549 7,550 7,553 Margin (%) Global Services 9.8 9.0 9.1 9.8 9.8 9.8 9.8 9.8 9.8 9.8 Business 33.7 32.1 31.3 31.7 31.7 31.7 31.7 31.7 31.7 31.7 Consumer 23.1 20.5 20.2 20.4 20.8 21.3 21.3 21.3 21.3 21.3 EE 21.5 22.7 25.0 26.0 26.0 27.0 28.0 28.0 28.0 28.0 Wholesale 40.0 39.5 37.0 37.0 37.0 37.0 37.0 37.0 37.0 37.0 Openreach 52.4 51.6 49.5 49.5 49.5 49.5 49.6 49.7 49.8 49.9 Total 33.0 31.7 31.4 31.8 31.7 32.0 32.3 32.4 32.4 32.4 Ex GS 39.4 38.4 37.5 37.8 37.6 38.0 38.3 38.3 38.3 38.3 Annual Growth (%) Global Services 3.1 -1.4 -5.7 7.2 -1.4 -1.1 -0.8 -0.6 -0.5 -0.4 Business 2.9 -9.7 -6.5 0.1 -2.0 -1.5 -1.2 -0.9 -0.7 -0.6 Consumer 1.6 -4.8 1.2 -0.9 1.4 1.9 -0.6 -0.5 -0.5 -0.4 EE 6.0 6.4 14.2 7.3 1.3 4.3 4.4 0.6 0.5 0.5 Wholesale -0.8 -5.5 -10.0 -1.5 -2.0 -2.0 -1.9 -1.9 -1.9 -1.9 Openreach 2.3 -1.4 -3.9 -5.0 -1.8 0.6 1.0 0.9 0.9 0.9 Other 77.5 -81.7 15.4 -133.3 0.0 0.0 0.0 0.0 0.0 0.0 Total 2.1 -2.3 -1.8 0.1 -0.8 0.7 0.6 -0.0 0.0 0.0 Source: Company reports, Barclays Research estimates

3 May 2018 8 Barclays | BT Group PLC

FIGURE 8 BT: P&L (£m)

BT Group P&L (£m) FY17 FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E Group turnover 24,082 23,878 23,648 23,515 23,419 23,364 23,330 23,311 23,306 EBITDA (pre-exceptionals) 7,645 7,505 7,509 7,449 7,504 7,552 7,549 7,550 7,553 EBITDA margin (%) 31.7 31.4 31.8 31.7 32.0 32.3 32.4 32.4 32.4 Depreciation and amortisation 3,510 3,489 3,523 3,532 3,255 3,283 3,312 3,342 3,368 Underlying Operating Profit (EBIT) 4,135 4,016 3,985 3,917 4,249 4,270 4,237 4,208 4,186 Net interest -803 -746 -727 -686 -666 -639 -628 -616 -604 of which interest costs -594 -528 -509 -468 -448 -421 -410 -398 -386 Group share of JV and ass. Loss -9 0 1 1 1 1 1 1 1 Underlying PBT 3,532 3,488 3,478 3,450 3,802 3,849 3,828 3,811 3,800 Specific Items -969 -586 -100 -100 -100 -100 -100 -100 -100 Net interest on Pension -209 -218 -218 -218 -218 -218 -218 -218 -218 Total Specific Items -1,178 -804 -318 -318 -318 -318 -318 -318 -318 Reported PBT 2,354 2,684 3,160 3,132 3,484 3,531 3,510 3,493 3,482 Taxation 446 633 642 637 703 712 708 705 703 of which Underlying 663 715 661 656 722 731 727 724 722 of which exceptional -217 -82 -19 -19 -19 -19 -19 -19 -19 Regular tax rate 19% 20% 19% 19% 19% 19% 19% 19% 19% Minority interests 0 0 0 0 0 0 0 0 0 Profit after taxation 1,908 2,051 2,518 2,496 2,781 2,819 2,802 2,788 2,779 Clean Net Income 2,660 2,555 2,599 2,577 2,862 2,900 2,883 2,869 2,860 Clean Net Income (excl. pension interest) 2,869 2,773 2,817 2,795 3,080 3,118 3,101 3,087 3,078

EPS EPS before net interest on pensions and specific items 28.9 28.0 28.6 28.3 31.3 31.6 31.5 31.4 31.3 EPS before specific items 26.8 25.8 26.4 26.1 29.0 29.4 29.3 29.1 29.1 EPS after specific items 19.2 20.7 25.5 25.3 28.2 28.6 28.5 28.3 28.2

Dividend per share 15.4 15.9 16.1 16.2 16.4 16.6 16.5 16.5 16.4 Payout ratio 53% 57% 56% 57% 53% 53% 53% 53% 53%

Annual Growth (%) Revenues 27.4 -0.8 -1.0 -0.6 -0.4 -0.2 -0.1 -0.1 -0.0 EBITDA (pre-exceptionals, pre leavers) 16.2 -1.8 0.1 -0.8 0.7 0.6 -0.0 0.0 0.0 Underlying PBT 18.1 -1.3 -0.3 -0.8 10.2 1.2 -0.5 -0.5 -0.3 EPS before net interest on pensions and specific items 8.0 -3.0 1.9 -0.8 10.2 1.3 -0.5 -0.4 -0.2 EPS before specific items 10.4 -3.6 2.1 -0.8 11.1 1.4 -0.6 -0.5 -0.3 EPS after specific items -18.7 7.9 23.2 -0.9 11.5 1.4 -0.6 -0.5 -0.3 DPS 10.0 3.4 1.0 1.0 1.0 1.3 -0.5 -0.4 -0.2 Source: Company reports, Barclays Research estimates

3 May 2018 9 Barclays | BT Group PLC

FIGURE 9 BT: Cashflow Statement (£m)

Cash flow statement FY17 FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E Cashflow per BT Definition (for reconciliation) Adjusted EBITDA 7,645 7,505 7,509 7,449 7,504 7,552 7,549 7,550 7,553 Capital expenditure -3,117 -3,441 -3,604 -3,562 -3,563 -3,570 -3,577 -3,585 -3,534 Interest -620 -530 -509 -468 -448 -421 -410 -398 -386 Tax -660 -506 -683 -1,092 -637 -703 -712 -708 -705 Change in working capital -461 -230 0 0 0 0 0 0 0 Other 20 1 3 5 6 6 6 6 6 Normalised FCF 2,807 2,798 2,717 2,332 2,863 2,864 2,856 2,864 2,934 Cash tax benefit of pension deficit payments 110 200 190 190 190 190 190 190 190 FCF (pre pension deficit payment and specific items) 2,917 2,998 2,907 2,522 3,053 3,054 3,046 3,054 3,124 Spectrum 0 0 -302 -1,100 0 0 0 0 0 Specific items -205 -954 -100 -100 -100 -100 -100 -100 -100 Free cash flow (pre gross pension deficit payment) 2,712 2,044 2,505 1,322 2,953 2,954 2,946 2,954 3,024 Gross pension deficit payment -274 -704 -1,000 -1,000 -1,000 -1,000 -1,000 -1,000 -1,000 Free cash flow (post gross pension deficit payment) 2,438 1,340 1,505 322 1,953 1,954 1,946 1,954 2,024 Dividend Payments -1,435 -1,524 -1,578 -1,593 -1,608 -1,626 -1,634 -1,626 -1,619 Net debt 8,932 9,372 9,525 10,875 10,610 10,362 10,129 9,881 9,556 Net debt/EBITDA (x) 1.2 1.2 1.3 1.5 1.4 1.4 1.3 1.3 1.3 Source: Company reports, Barclays Research estimates

3 May 2018 10 Barclays | BT Group PLC

Valuation We cut our price target to 280p/share (was 350p), reflecting lower medium-term estimates.

FIGURE 10 BT: SOTP (p/Share)

Value Per Division EV Split (%) EV/Revenues EV/EBITDA EV/EBIT EV/OpFCF Share

Global Services DCF 1,871 3.9 19.0 0.4 3.7 21.3 12.1 Business DCF 10,645 22.2 108.0 2.4 7.4 9.8 8.9 Consumer DCF 6,712 14.0 68.1 1.4 6.6 8.6 9.0 Wholesale DCF 4,223 8.8 42.8 2.1 5.7 9.3 8.1 Openreach DCF 14,168 29.5 143.7 2.9 5.9 14.2 23.3 Other OpFCF Multiple -750 -1.6 -7.6 N/M -150.0 16.7 10.0 EE DCF 11,176 23.3 113.3 2.1 7.9 17.9 14.7 Total DCF 48,044 100.0 487.3 1.8 6.4 12.1 12.3 Net Debt (Mar 19) -9,525 Other -1,749 IAS 19 pension surplus (deficit) -9,200 Value of equity 27,571 Number of Shares 9,860 Price Target 280 Source: Barclays Research estimates

We do not consider valuation to be demanding. On our current forecasts BT trades on 5.8x March 2019E EV/EBITDA, 11.2x EV/OpFCF, 8.2% equity FCF yield and offers a 6.9% dividend yield (sector on 6.2x, 12.8x, 6.6% and 5%, respectively). Our equity and EV multiples adjust for BT’s pension deficit, where we assume £9bn gross of tax.

FIGURE 11 BT: Valuation multiples (%, x)

Mar 2018E 2019E 2020E 2021E 2021E 2021E 2021E P/E (x) 12.0 9.1 8.6 7.1 6.4 5.9 5.3 EFCF yield (%) 7.6% 8.2% 9.1% 9.9% 11.1% 12.2% 13.6% Dividend yield (%) 6.4% 6.9% 7.5% 8.2% 9.0% 9.9% 10.9% TSR yield (%) 6.6% 6.7% 7.3% 7.9% 8.6% 9.5% 10.3% EV/EBITDA 6.1 5.8 5.6 5.2 4.8 4.5 4.2 EV/OpFCF 11.2 11.2 10.8 9.9 9.2 8.5 7.9 Unlevered EFCF yield (%) 7.0% 7.3% 7.7% 8.2% 8.9% 9.5% 10.3% Source: Barclays Research estimates, priced COB 30 April 2018

3 May 2018 11 Barclays | BT Group PLC

UK Wireless

FIGURE 12 FIGURE 13 UK: Total subscriber market share (%) UK: Subscriber net adds (000s)

100% -1,000 -500 0 500 1,000 7% 7% 7% 7% 6% 5% 8% 7% 7% 7%6% 7%7% 90% 10% 11% 11% 12% 12% 12% 12% 13% 13% 14% 14% 1Q14 80% 2Q14 3Q14 70% 23% 23% 23% 24% 24% 23% 22% 22% 21% 21% 21% 4Q14 60% 1Q15 50% 2Q15 27% 27% 28% 28% 29% 29% 29% 30% 30% 30% 30% 3Q15 40% 4Q15 30% 1Q16 2Q16 20% 3Q16 32% 31% 31% 30% 30% 29% 29% 29% 29% 29% 28% 10% 4Q16 1Q17 0% 2Q17 3Q17

4Q17

3Q14 4Q14 1Q15 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 EE O2 Vodafone 3UK Other EE O2 Vodafone 3UK

Source: Company data, Barclays Research Source: Company data, Barclays Research

FIGURE 14 FIGURE 15 UK: Total contract subscriber market share (%) UK: Contract net adds (000s)

100% -10 190 390 590 790 4% 4% 5% 5% 5% 6% 6% 6% 5% 6% 7%7%7% 1Q14 90% 12% 12% 12% 13% 12% 12% 12% 12% 12% 12% 12% 12% 2Q14 80% 3Q14 70% 25% 25% 25% 25% 24% 24% 24% 24% 23% 23%22% 22% 4Q14 60% 1Q15 2Q15 50% 3Q15 27% 27% 28% 27% 28% 28% 28% 28% 29% 29% 28% 28% 40% 4Q15 1Q16 30% 2Q16 20% 3Q16 31% 31% 31% 31% 31% 30% 30% 30% 31%31% 31% 31% 4Q16 10% 1Q17 0% 2Q17 3Q17

4Q17

2Q12 3Q12 4Q12 1Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 EE O2 Vodafone 3UK Other EE O2 Vodafone 3UK

Source: Company data, Barclays Research Source: Company data, Barclays Research

FIGURE 16 FIGURE 17 UK: Mobile service revenue growth (%) UK: Underlying mobile service revenue growth (%) 10% 10% 8% 8% 6% 6% 4% 2% 4% 0% 2% -2% 0% -4% -2% -6% -8% -4%

-10% -6%

1Q16 2Q16 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

1Q14 2Q15 3Q16 4Q17 1Q13 2Q13 3Q13 4Q13 2Q14 3Q14 4Q14 1Q15 3Q15 4Q15 1Q16 2Q16 4Q16 1Q17 2Q17 3Q17

1Q18E 2Q18E 3Q18E 4Q18E

1Q18E 2Q18E 3Q18E 4Q18E EE O2 Vodafone 3UK Total EE O2 Vodafone 3UK Total

Source: Company data, Barclays Research estimates Source: Company data, Barclays Research estimates

3 May 2018 12 Barclays | BT Group PLC

FIGURE 18 FIGURE 19 UK: Mobile contract ARPU UK: Annualized mobile contract churn (%)

20 22% 18 20% 16 14 18% 12 10 16% 8 14% 6 4 12% 2

0 10%

2Q16 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

4Q13 4Q15 4Q17 1Q13 2Q13 3Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 EE O2 Vodafone EE O2 Vodafone

Source: Company data, Barclays Research Source: Company data, Barclays Research

FIGURE 20 FIGURE 21 UK: Contract gross adds UK: Contract gross additions share

0 500 1,000 1,500 2,000 2,500 100% 17% 17% 15% 15% 16% 13% 12% 16% 15% 1Q14 90% 18% 18% 24% 2Q14 80% 3Q14 26% 28% 26% 22% 4Q14 70% 27% 24% 28% 28% 27% 30% 29% 23% 1Q15 60% 2Q15 50% 3Q15 26% 26% 30% 29% 30% 22% 19% 4Q15 40% 27% 25% 26% 29% 27% 1Q16 30% 2Q16 3Q16 20% 35% 36% 28% 28% 29% 29% 31% 28% 29% 29% 32% 34% 4Q16 10% 1Q17 0% 2Q17

3Q17

2Q13 3Q13 4Q13 1Q14 2Q12 3Q12 4Q12 1Q13 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 4Q17 1Q12 EE O2 Vodafone Hutch EE O2 Vodafone Hutch

Source: Company data, Barclays Research Source: Company data, Barclays Research

3 May 2018 13 Barclays | BT Group PLC

UK Fixed

FIGURE 22 FIGURE 23 Broadband market by technology (%) Voice lines by technology (%)

100% 100% 3% 3% 4% 4% 4% 5% 5% 5% 5% 5% 5% 5% 90% 19% 20% 19% 19% 19% 19% 19% 19% 19% 20% 20% 15% 15% 14% 14% 14% 14% 14% 14% 14% 15% 15%15% 80% 80% 70% 19% 19% 19% 18% 17% 17% 17% 16% 14% 14% 14%14% 60% 39% 40% 41% 40% 40% 41% 40% 40% 40% 40% 60% 40% 18% 50% 19% 21% 23% 24% 25% 26% 26% 27% 27% 27%28% 40% 40% 4% 3% 4% 10% 10% 9% 8% 8% 8% 8% 8% 30% 46% 20% 44% 42% 41% 41% 39% 39% 38% 40% 40% 40%38% 20% 37% 37% 36% 30% 30% 30% 31% 32% 32% 32% 32% 10% 0%

0%

1Q13 2Q15 4Q17 1Q12 2Q12 3Q12 4Q12 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17

2Q13 3Q13 4Q16 1Q17 1Q12 2Q12 3Q12 4Q12 1Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 2Q17 3Q17 4Q17 Retail FULL Wholesale Cable Other Retail Wholesale LLU Cable Other Source: Barclays Research, company reporting, regulator data Source: Barclays Research, company reporting, regulator data

FIGURE 24 FIGURE 25 Quarterly broadband net adds (’000s) Broadband market by operator (%)

-300 -200 -100 0 100 200 300 100% 1Q14 2Q14 28% 28% 29% 28% 27% 27% 28% 28% 27% 27% 27%27% 3Q14 80% 4Q14 1Q15 19% 19% 19% 19% 19% 20% 20% 2Q15 60% 19% 20% 19% 19% 20% 3Q15 4Q15 19% 19% 18% 18% 18% 18% 17% 16% 16% 16% 16%16% 1Q16 40% 2Q16 3% 3% 3% 3% 3% 4% 4% 4% 3Q16 4Q16 20% 30% 31% 32% 32% 32% 32% 37% 37% 37% 1Q17 30% 30% 2Q17 3Q17 0%

4Q17

4Q12 1Q14 1Q17 1Q12 2Q12 3Q12 1Q13 2Q13 3Q13 4Q13 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 2Q17 3Q17 4Q17 BT EE TalkTalk VMED BT EE TalkTalk VMED Other ISPs Source: Barclays Research, company reporting, regulator data Source: Barclays Research, company reporting, regulator data

FIGURE 26 FIGURE 27 Consumer fixed-line revenues (€bn) Consumer fixed-line revenue growth (%) 3.0 10.0%

8.0%

478 478

466 466

470 470

465 465

477 477 455 455

2.5 453

458 458

447 447

440 440 446 446

450 450 6.0%

440 440

447 447

436 436

437 437

416 416

0.3

383 383

0.3

395 395 0.3

0.3

413 413

0.3

0.3

311 311

0.3

368 368

256 256

0.3

280 280 283 283

341 341

334 334 0.3

331 331 0.3

0.4 4.0%

2.0 0.3

0.4

0.4

0.3

0.3

0.4

0.3

0.3

0.4

0.3

0.3

0.3

0.3

0.3

0.3

0.3 0.3

0.8 2.0%

0.8

0.8

0.8

0.8

0.8

0.8 0.8

1.5 0.8

0.8

0.7

0.8

0.7

0.7

0.7

0.7

0.7

0.7

0.7

0.7

0.7

0.7 0.7

0.7 0.0%

0.6

0.7 0.7 0.7

1.0 -2.0%

1.3

1.3 1.3

1.3

1.3

1.2 1.2

1.2 -4.0%

1.2

1.1

1.1

1.1

1.1

1.1 1.1

0.5 1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0 1.0 -6.0%

0.0

1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 2Q12 3Q12 4Q12 2Q13 3Q13 4Q13 2Q14 3Q14 4Q14 2Q15 3Q15 4Q15 2Q16 3Q16 4Q16 2Q17 3Q17 4Q17

2Q11 1Q12 1Q14 1Q16 4Q16 1Q11 3Q11 4Q11 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 2Q16 3Q16 1Q17 2Q17 3Q17 4Q17 BT VMED Talk Talk EE Other BT VMED Talk Talk Total Market

Source: Barclays Research, company reporting Source: Barclays Research, company reporting

3 May 2018 14 Barclays | BT Group PLC

ANALYST(S) CERTIFICATION(S): We, Maurice Patrick and Mathieu Robilliard, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.

IMPORTANT DISCLOSURES CONTINUED

Barclays Research is produced by the Investment Bank of Barclays Bank PLC and its affiliates (collectively and each individually, "Barclays"). Availability of Disclosures: Where any companies are the subject of this research report, for current important disclosures regarding those companies please refer to https://publicresearch.barclays.com or alternatively send a written request to: Barclays Research Compliance, 745 Seventh Avenue, 13th Floor, New York, NY 10019 or call +1-212-526-1072. The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by investment banking activities, the profitability and revenues of the Markets business and the potential interest of the firm's investing clients in research with respect to the asset class covered by the analyst. All authors contributing to this research report are Research Analysts unless otherwise indicated. The publication date at the top of the report reflects the local time where the report was produced and may differ from the release date provided in GMT. Research analysts employed outside the US by affiliates of Barclays Capital Inc. are not registered/qualified as research analysts with FINRA. Such non-US research analysts may not be associated persons of Barclays Capital Inc., which is a FINRA member, and therefore may not be subject to FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst’s account. Analysts regularly conduct site visits to view the material operations of covered companies, but Barclays policy prohibits them from accepting payment or reimbursement by any covered company of their travel expenses for such visits. In order to access Barclays Statement regarding Research Dissemination Policies and Procedures, please refer to https://publicresearch.barcap.com/S/RD.htm. In order to access Barclays Research Conflict Management Policy Statement, please refer to: https://publicresearch.barcap.com/S/CM.htm. Barclays Research Department produces various types of research including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of Barclays Research may differ from those contained in other types of Barclays Research, whether as a result of differing time horizons, methodologies, or otherwise. The Barclays Research Department operates independently from the Absa Research Department. Absa Research is produced by Absa Bank Limited acting through its Corporate and Investment Bank division, which is a part of Barclays Africa Group Limited and affiliated with the Investment Bank of Barclays Bank PLC. Eligible clients may receive research reports from both research departments, which may reach different conclusions and may contain different and conflicting forecasts, recommendations, or trade ideas. Primary Stocks (Ticker, Date, Price) BT Group PLC (BT.L, 01-May-2018, GBp 245), Equal Weight/Positive, A/D/J/K/L/M/N Prices are sourced from Thomson Reuters as of the last available closing price in the relevant trading market, unless another time and source is indicated. Disclosure Legend: A: Barclays Bank PLC and/or an affiliate has been lead manager or co-lead manager of a publicly disclosed offer of securities of the issuer in the previous 12 months. B: An employee or non-executive director of Barclays Bank PLC and/or an affiliate is a director of this issuer. CD: Barclays Bank PLC and/or an affiliate is a market-maker in debt securities issued by this issuer. CE: Barclays Bank PLC and/or an affiliate is a market-maker in equity securities issued by this issuer. D: Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from this issuer in the past 12 months. E: Barclays Bank PLC and/or an affiliate expects to receive or intends to seek compensation for investment banking services from this issuer within the next 3 months. FA: Barclays Bank PLC and/or an affiliate beneficially owns 1% or more of a class of equity securities of this issuer, as calculated in accordance with US regulations. FB: Barclays Bank PLC and/or an affiliate beneficially owns a long position of more than 0.5% of a class of equity securities of this issuer, as calculated in accordance with EU regulations. FC: Barclays Bank PLC and/or an affiliate beneficially owns a short position of more than 0.5% of a class of equity securities of this issuer, as calculated in accordance with EU regulations. GD: One of the analysts on the fundamental credit coverage team (or a member of his or her household) has a financial interest in the debt or equity securities of this issuer. GE: One of the analysts on the fundamental equity coverage team (or a member of his or her household) has a financial interest in the debt or

3 May 2018 15 Barclays | BT Group PLC

IMPORTANT DISCLOSURES CONTINUED equity securities of this issuer. H: This issuer beneficially owns more than 5% of any class of common equity securities of Barclays PLC. I: Barclays Bank PLC and/or an affiliate is party to an agreement with this issuer for the provision of financial services to Barclays Bank PLC and/or an affiliate. J: Barclays Bank PLC and/or an affiliate is a liquidity provider and/or trades regularly in the securities of this issuer and/or in any related derivatives. K: Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation (including compensation for brokerage services, if applicable) from this issuer within the past 12 months. L: This issuer is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate. M: This issuer is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC and/or an affiliate. N: This issuer is, or during the past 12 months has been, a non-investment banking client (non-securities related services) of Barclays Bank PLC and/or an affiliate. O: Not in use. P: A partner, director or officer of Barclays Capital Canada Inc. has, during the preceding 12 months, provided services to the subject company for remuneration, other than normal course investment advisory or trade execution services. Q: Barclays Bank PLC and/or an affiliate is a Corporate Broker to this issuer. R: Barclays Capital Canada Inc. and/or an affiliate has received compensation for investment banking services from this issuer in the past 12 months. S: This issuer is a Corporate Broker to Barclays PLC. T: Barclays Bank PLC and/or an affiliate is providing equity advisory services to this issuer. U: The equity securities of this Canadian issuer include subordinate voting restricted shares. V: The equity securities of this Canadian issuer include non-voting restricted shares. Risk Disclosure(s) Master limited partnerships (MLPs) are pass-through entities structured as publicly listed partnerships. For tax purposes, distributions to MLP unit holders may be treated as a return of principal. Investors should consult their own tax advisors before investing in MLP units. Guide to the Barclays Fundamental Equity Research Rating System: Our coverage analysts use a relative rating system in which they rate stocks as Overweight, Equal Weight or Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry (the "industry coverage universe"). In addition to the stock rating, we provide industry views which rate the outlook for the industry coverage universe as Positive, Neutral or Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone. Stock Rating Overweight - The stock is expected to outperform the unweighted expected total return of the industry coverage universe over a 12-month investment horizon. Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the industry coverage universe over a 12- month investment horizon. Underweight - The stock is expected to underperform the unweighted expected total return of the industry coverage universe over a 12-month investment horizon. Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including where the Investment Bank of Barclays Bank PLC is acting in an advisory capacity in a merger or strategic transaction involving the company. Industry View Positive - industry coverage universe fundamentals/valuations are improving. Neutral - industry coverage universe fundamentals/valuations are steady, neither improving nor deteriorating. Negative - industry coverage universe fundamentals/valuations are deteriorating. Below is the list of companies that constitute the "industry coverage universe": European Telecom Services Altice NV (ATCA.AS) Bezeq (BEZQ.TA) Bouygues SA (BOUY.PA) BT Group PLC (BT.L) Cellcom Israel Ltd. (CEL.TA) Cellnex Telecom (CLNX.MC) CityFibre Infrastructure Holdings PLC (CITYC.L) Com Hem (COMH.ST) Deutsche Telekom AG (DTEGn.DE)

3 May 2018 16 Barclays | BT Group PLC

IMPORTANT DISCLOSURES CONTINUED

DNA Oyj (DNAO.HE) Drillisch (DRIG.DE) Elisa Oyj (ELI1V.HE) Euskaltel SA (EKTL.MC) Freenet (FNTGn.DE) Gamma Communications PLC (GAMA.L) Iliad SA (ILD.PA) Inmarsat plc (ISA.L) INWIT (INWT.MI) KCOM (KCOM.L) KPN (KPN.AS) Liberty Global (LBTYA) Manx Telecom (MANX.L) Masmovil (MASM.MC) NOS (NOS.LS) Orange (ORAN.PA) Orange Belgium (OBEL.BR) OTE (OTEr.AT) Partner Communications Company Ltd. Proximus (PROX.BR) Sunrise (SRCG.S) (PTNR.TA) Swisscom (SCMN.S) TalkTalk Telecom Group (TALK.L) TDC (TDC.CO) Tele Columbus AG (TC1n.DE) Tele2 AB (TEL2b.ST) Telecom Italia SpA (TLIT.MI) Telecom Italia-RSP (TLITn.MI) Telefonica Deutschland (O2Dn.DE) Telefonica SA (TEF.MC) Telekom Austria (TELA.VI) Telenet Group Holding NV (TNET.BR) Telenor ASA (TEL.OL) Telia Company AB (TELIA.ST) United Internet (UTDI.DE) ViaSat (VSAT) Vodafone Group Plc (VOD.L)

Distribution of Ratings: Barclays Equity Research has 1561 companies under coverage. 42% have been assigned an Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 58% of companies with this rating are investment banking clients of the Firm; 75% of the issuers with this rating have received financial services from the Firm. 39% have been assigned an Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 48% of companies with this rating are investment banking clients of the Firm; 70% of the issuers with this rating have received financial services from the Firm. 15% have been assigned an Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 37% of companies with this rating are investment banking clients of the Firm; 68% of the issuers with this rating have received financial services from the Firm. Guide to the Barclays Research Price Target: Each analyst has a single price target on the stocks that they cover. The price target represents that analyst's expectation of where the stock will trade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst's price target over the same 12-month period. Top Picks: Barclays Equity Research's "Top Picks" represent the single best alpha-generating investment idea within each industry (as defined by the relevant "industry coverage universe"), taken from among the Overweight-rated stocks within that industry. Barclays Equity Research publishes "Top Picks" reports every quarter and analysts may also publish intra-quarter changes to their Top Picks, as necessary. While analysts may highlight other Overweight-rated stocks in their published research in addition to their Top Pick, there can only be one "Top Pick" for each industry. To view the current list of Top Picks, go to the Top Picks page on Barclays Live (https://live.barcap.com/go/keyword/TopPicks). To see a list of companies that comprise a particular industry coverage universe, please go to https://publicresearch.barclays.com. Explanation of other types of investment recommendations produced by Barclays Equity Research: Trade ideas, thematic screens or portfolio recommendations contained herein that have been produced by analysts within Equity Research shall remain open until they are subsequently amended or closed in a future research report. Disclosure of previous investment recommendations produced by Barclays Equity Research: Barclays Equity Research may have published other investment recommendations in respect of the same securities/instruments recommended in this research report during the preceding 12 months. To view previous investment recommendations published by Barclays Equity Research in the preceding 12 months please refer to https://live.barcap.com/go/research/Recommendations. Legal entities involved in producing Barclays Research: Barclays Bank PLC (Barclays, UK) Barclays Capital Inc. (BCI, US) Barclays Securities Japan Limited (BSJL, Japan) Barclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong) Barclays Capital Canada Inc. (BCCI, Canada) Barclays Bank Mexico, S.A. (BBMX, Mexico) Barclays Securities (India) Private Limited (BSIPL, India)

3 May 2018 17 Barclays | BT Group PLC

IMPORTANT DISCLOSURES CONTINUED Barclays Bank PLC, India branch (Barclays Bank, India) Barclays Bank PLC, Singapore branch (Barclays Bank, Singapore)

3 May 2018 18 Barclays | BT Group PLC

IMPORTANT DISCLOSURES CONTINUED BT Group PLC (BT/A LN / BT.L) Stock Rating Industry View GBp 245 (01-May-2018) EQUAL WEIGHT POSITIVE Rating and Price Target Chart - GBP (as of 01-May-2018) Currency=GBP Publication Date Closing Price Rating Adjusted Price 6.5 Target 6.0 08-Dec-2017 2.68 3.50 08-Nov-2017 2.51 4.20 5.5 12-May-2017 3.06 4.50 5.0 30-Jan-2017 3.06 4.75 4.5 06-Dec-2016 3.52 5.25 01-Jul-2016 4.10 5.50 4.0 15-Oct-2015 4.27 6.00 3.5 30-Sep-2015 4.20 5.80 3.0 05-May-2015 4.49 Overweight 6.00

2.5 On 02-May-2015, prior to any intra-day change that may have been published, the rating and price target for this security were suspended. 2.0 Source: Thomson Reuters, Barclays Research

Jul- 2015 Jan- 2016 Jul- 2016 Jan- 2017 Jul- 2017 Jan- 2018 Historical stock prices and price targets may have been adjusted for stock splits and dividends. Closing Price Target Price Rating Change Source: IDC, Barclays Research Link to Barclays Live for interactive charting A: Barclays Bank PLC and/or an affiliate has been lead manager or co-lead manager of a publicly disclosed offer of securities of BT Group PLC in the previous 12 months. D: Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from BT Group PLC in the past 12 months. J: Barclays Bank PLC and/or an affiliate is a liquidity provider and/or trades regularly in the securities by BT Group PLC and/or in any related derivatives. K: Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation (including compensation for brokerage services, if applicable) from BT Group PLC within the past 12 months. L: BT Group PLC is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate. M: BT Group PLC is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC and/or an affiliate. N: BT Group PLC is, or during the past 12 months has been, a non-investment banking client (non-securities related services) of Barclays Bank PLC and/or an affiliate. Valuation Methodology: We value BT based on a SOTP and DCF methodology, with a 7% WACC and 1% terminal growth rate. Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: Risks include TalkTalk's aggressive pricing on mobile and ability to execute synergies. The pension deficit remains volatile with changes in discount rates and mortality assumptions.

3 May 2018 19

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