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BT avoids break-up with plan to run network arm separately

* BT avoids break-up after year-long investigation

* Openreach to be run as legally separate company

* BT to retain control over budget, investment

* BT shares rise more than 4 percent (Adds quotes, reaction)

By Kate Holton

LONDON, July 26 (Reuters) - Britain's biggest telecoms operator BT avoided being broken up on Tuesday when the regulator proposed putting the firm's network into a legally separate company within the wider group in a bid to improve broadband coverage.

Britain currently ranks favourably with its European peers in terms of broadband speeds and costs, but with much of the infrastructure based on BT's copper network, the regulator fears the world's fifth-largest economy will fall behind unless it upgrades to fibre.

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Plans set out on Tuesday by Ofcom are designed to improve the running of the BT Openreach network and incentivise both BT and its rivals to invest in new infrastructure to enable Britain to be able to compete with the likes of South Korea and Japan.

They are also designed to address years of industry complaints that BT runs the national network to its own benefit - ploughing profits from the division into boosting BT's consumer broadband and TV offering - at the expense of the network and the smaller competitors who rely on it to offer services.

"I think BT's Openreach network has not done a good enough job on customer service," Ofcom Chief Executive Sharon White told reporters. "Today is as much about ensuring that the investments that happen in this country aren't just about serving BT Retail, it's about serving all customers."

BT rivals which rely on Openreach had called for BT to be broken up, but in its findings Ofcom said one of the biggest obstacles to a full separation was the BT pension scheme, one of the largest in the country.

BT, the 170-year-old former monopoly that leads the market in mobile and fixed-line telecoms, said it agreed to most of Ofcom's proposals but needed to hammer out the finer details of how the separation would affect asset allocations and staffing.

Analysts said the proposals were unlikely to increase costs or damage profits at BT in the short term and the firm's share price rose 4 percent on the news.

Under the plans, the BT Openreach division will be placed in a legally separate company, with an independent board taking control of its budget, staff and customer relations.

A majority of non-executive directors, including the chairman, will be appointed and removed by BT in consultation with Ofcom. When making decisions on large scale investments, the board will also be obliged to consult formerly with customers such as Sky (LSE: BSY.L - news) and TalkTalk, who compete with BT in offering telephony, broadband and TV.

FULL SEPARATION

The aim is to make Openreach more independent, enabling it to make investments that work for all operators, without incurring the cost and disruption that would come from a full separation.

As a legally separate company, with its own 'Articles of Association', Openreach and its directors would be required to make decisions in the interests of all Openreach's customers, and to promote the success of the company.

"If it cannot achieve this, Ofcom will reconsider whether BT and Openreach should be split into two entirely separate companies, under different ownership," the regulator said.

BT's rivals said the proposal went some way to addressing their concerns but they were disappointed that Ofcom had not pursued a full separation.

"BT has an abysmal track record in building the kind of gigabit-capable fibre-optic networks expanding rapidly across Europe and beyond, setting itself mediocre goals which it then repeatedly fails to deliver," said Vodafone UK Chief Executive Jeroen Hoencamp.

"Legal separation of Openreach from BT is an important step forward in helping to address those deficiencies."

Around 2.4 million homes in Britain cannot get a minimum 10 megabits-a-second broadband service and only 2 percent of the country has the gold standard of a fibre connection which runs all the way into the premises (FTTP).

BT had shied away from FTTP, saying it could squeeze faster speeds out of its copper connections into homes and premises with its G.fast technology that will reach speeds of 500MbPs in the next few years.

"BT will retain control over the overall budget for Openreach and it appears that it will be able to recoup any costs associated with the reorganisation," said Andrew Hogley, an analyst at Mirabaud.

"Longer term, BT Retail should have no strategic advantage versus Sky and TalkTalk in terms of its relationship with Openreach. This may have an impact but ... we expect these to be modest."

The regulator will now launch a consultation until Oct (Shenzhen: 000069.SZ - news) . 4 to get the opinions of everyone in the sector, including BT and its rivals. (Reporting by Kate Holton; Editing by Sarah Young and Susan Fenton)