Wednesday 12 December 2018

Share watch: Telecom giant BT under siege on several fronts

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John Lynch

William Shakespeare got it spot-on when he allowed the king in 'Hamlet' to intone: "When sorrows come, they come not single spies, but in battalions!"

One very large British company, British Telecom (BT), will have embraced this sentiment over recent years as sorrows have come cascading in its direction, one after another.

The lumbering giant, which up to very recently had 108,000 employees and revenues of £24bn (€27.3bn), has had to face the ordeal that most businesses dread: calling in the consultants.

McKinsey got the gig, which involves undoing a string of expensive management blunders. The group has also seen its share price in intensive care while watching its pension scheme get horribly out of control.

The remedial action forced on the group includes a cut in its workforce, promising 13,000 job losses.

Chief executive officer Gavin Patterson became one of them when he resigned on Friday. The business plans to save something close to £1.5bn (€1.7bn) in the next three years and reorganise its crippling pension costs.

If all this is not enough, it is selling its London HQ to get some shape on its finances. None of this, however, will be sufficient to secure a resumption of profit growth for at least two years and revenue growth is even farther away.

This is not expected for three years. Analysts wonder if the management is able to solve all its problems.

Decisions that went badly askew include an ill-fated move back into mobile phones and a gamble on pay TV that backfired. It purchased EE Mobile for £12.5bn (€14.2bn) two years ago after abandoning the mobile market in 2001 and shares rose to £4.30 (€4.90), a 14-year high.

However, a torrent of bad news since then has seen the share price fall and today it trades at 205p per share, just above its yearly low 201p.

The group has landed itself in the midst of an accounting scandal in Italy; a UK investigation that has examined its dominant network position and with the previously mentioned widening pension deficit.

The Irish public will be most familiar with BT's 'non-core' move into sport on television. It spent £5bn (€5.7bn) on acquiring the rights to broadcast UK football games and over the next two years it will fork out more on European football.

The critics of this move say the group would be better off investing in its core technology, such as fibre connectivity.

While splashing out on football, the dividend payout has been frozen and 13,000 jobs lost. The football spend is more than is allocated for capital expenditure this year and exceeds commitment to its pension scheme. Not a good scene.

The group has secured the 5G licence in recent auctions and plans to roll it out at the end of 2019. It has also struck a new deal to fund its pension fund hole, now a huge £11bn (€12.5bn) and amazingly more than half of the company's £20bn (€22.7bn) market value.

It also plans to upgrade three million homes to full fibre in the next two years and planned staff reductions will cost £800m (€910m) with the bulk of redundancies in the UK.

So far the group has given no update on its far-flung global services.

Investors are very unhappy with the slow pace of the turnaround. Last year BT reported a 1pc fall in revenues to £24bn (€27.2bn) and has signalled it will continue to be under pressure for the next few years as the company manages the decline of low margin hardware and new regulations for its broadband.

The jobs cuts are unlikely to offset regulatory pressure. The pension scheme top-up payments will continue until 2030 - too long for some.

Keeping the dividend unchanged means the stock will trade at an attractive dividend yield of 7pc. However, fears of a cut in dividends have not abated.

As priority will be given to network investment ahead of dividend payments, a cut cannot be ruled out.

Will the McKinsey plan be enough to dig BT out of the hole? The jury is out. What is certain the shares should be avoided at the present.

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

Irish Independent

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