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BT proving it is big enough to do battle with the best


British Telecom was once part of the British Post Office

British Telecom was once part of the British Post Office

British Telecom was once part of the British Post Office

Tell anyone under 40 that there was a time when you had to get on an 18-month waiting list for a telephone and they'd think you were harking back to the Middle Ages.

But of course that was the case in Ireland as recently as the 1970s. The sense of disbelief would be all the stronger because these days the telecom revolution has changed our lives.

It influences how we work, how we bank, how we look after our health, how we educate our children and even determines what we can see on the goggle-box.

Right slap in the forefront of that revolution is the UK's BT Group. Its newest plan, to get back into the mobile phone business, is opening newer and more exciting strategies for the future.

The company can trace its origins to the Electric Telegraph company set up in the mid-19th century and was once part of the British Post Office.

It was listed on the London Stock Exchange in 1984 as British Telecom (BT). Today it is a global giant. It has revenues of over £18bn, profits of £2bn, 85,000 employees and a market value of £36bn. It is the dominant fixed line operator, the leading provider of broadband services in the UK, and has been shaking up the UK telecom market.

It filled the sports and business pages with its expensive foray into football and rugby TV rights and, as already mentioned, has recently re-entered the mobile phone market, a market it abandoned in 2001.

It plans to acquire the mobile operator EE for £12.5bn. The move should bolster BT's multi-product telecom and TV strategy and collect another 25 million customers.

BT is organised around five divisions: global services, BT business, wholesale, Open Reach and consumer. Recently, the excitement has come from its consumer division, which grew 4pc last year; its highest in the last 10 years.

The company saw growth in its broadband market, reduction in its customers switching from BT, while its sports channel is playing a significant role, taking on Murdoch's Sky TV on the sports fields.

The other divisions, while not as exciting, show steady progress.

BT Global is the company's largest division, with 40pc of the group's revenue, from its customer base of 7,000 large companies. The UK is its main market, followed by key markets in Germany, Belgium and Holland.

The BT Business division includes its offering to smaller companies, IT services and Ireland (north and south). In Northern Ireland, it sells directly to the customer but in the Republic, only to businesses.

This may change if it successfully bids (with the ESB) for the rural broadband programme. Revenue at £3.5bn is static but operating profits increased, for the second consecutive year, thanks to the company's cost containment programme.

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The wholesale division sells its product range to other communications providers, this market is 'challenging' with revenue down 8pc to £2.4bn.

Open Reach is where BT is required to sell its products and services to all communication providers, on the same terms as its own lines and business.

BT's prospects appear stronger than they have for some time, with solid profit growth and a decent enough yield of 3.40. While sales last year were flat, its operating profit increased to £6bn helped by its cost transformation programme.

The latest update shows a 3pc drop in revenues but pre-tax profits up 12pc. Its shares rose to a 14-year high; followed by the proposed purchase of EE, and now trades at £4.36.

Investors are pleased with the dividend payout and the commitment to increase it for the next two years. However, investing in BT is not without some worry. Its pension deficit, which ballooned to £7bn, is of concern. In addition, re-entry into the mobile market may not be plain sailing.

Incumbents are unlikely to surrender market share easily. As the telecom industry consolidates, BT has acquired first mover advantage, only time will tell if it is a canny move.

Nothing in this section should be taken as a recommendation either explicit or implicit to buy any of the shares mentioned.

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