To be BT or not to be BT (according to Mrs T)

Citation

Curwen, P. (2009), "To be BT or not to be BT (according to Mrs T)", info, Vol. 11 No. 6. https://doi.org/10.1108/info.2009.27211fab.001

To be BT or not to be BT (according to Mrs T)

Article Type: Rearview From: info, Volume 11, Issue 6

A regular column on the information industries

In December 1984, 50.2 per cent of BT was privatized at 50p per share part-paid. Those who staged the issue, including the author, sold immediately and profitably for 90p per share. Fully paid in June 1986, this first issue cost investors £1.30 per share. A further offer of 28 per cent, which became fully-paid in March 1993, cost investors £3.50 per share, and the final tranche of shares, which became fully-paid in October 1994, cost investors £4.10 per share.

On 11 March 2009, each share in BT was worth £0.71p, considerably below the original issue price let alone that for the later tranches. True, the comparison is somewhat invidious given that bonus shares were issued to those individuals who held on to their allocations through thick and thin, a rights issue took place in November 2001, the then mmO₂ was sold off and dividends have at times exceeded the rate of return typically available for cash deposits. On the other hand, inflation since 1986 has resulted in a serious erosion of the real value of the pound, so it is fair to say that BT has not been a good long-term investment, and those who were in a position to sell for £15.13 per share during 2000 (equivalent to £10.80 adjusted for the rights issue) must surely regret their inaction.

It has to be said that investors in privatized telcos have often fared badly – ask the Australians who invested in Telstra – but the history of BT prior to 2005 should have forewarned shareholders that the future might not be all that smooth thereafter. The period up to the end of March 2003 is well covered in Curwen and Whalley (2004), and it is notable for the recurrence of the word “debt”. At the end of 2000, for example, having attempted with patchy success to become a global operator, BT had debts of $45 billion. True, other European telcos were even more indebted, but they were de facto underwritten by the state, as in Germany, whereas BT was on its own.

The rights issue of 2001 was largely successful and raised $9 billion, and a significant array of overseas assets (including, ironically, those in India) was sold off. However, BT was also obliged to do something unprecedented, namely sell off its mobile subsidiary in its entirety (as against float a minority stake), which left it with a structure totally at odds with that in other developed countries and bereft of access to the high-growth mobile sector other than as a reseller.

The other term that reared its ugly head at that time is “pension fund deficit”. In June 2002, this stood at £1.8 billion as measured independently under the new FRS17 accounting standard. One year later it stood at £2.8 billion, although BT itself estimated the figure to be much higher and pledged to commit £3.5 billion over the ensuing five years to bring it under control.

Much water has passed under the bridge over the past five years, but little appears to have changed overall. Obviously, given the structure of post-2003 BT, it had to pin its hopes of financial salvation on something for which it still had an infrastructure and some kind of ongoing reputation – which immediately ruled out most available options. The answer, at least in principle, was to become a provider of global telecoms and IT services, primarily to multinationals and government departments. But the new division, BT Global Services, unfortunately suffered from two defects: it could not deliver the promised number of contracts and its spending began to spiral out of control. As a result, and despite BT’s other divisions – Retail, Wholesale and Openreach – performing satisfactorily, BT was obliged to issue a profit warning in late October 2008 only to follow up with a second warning in January 2009.

Returning now to the initial figures, it may further be noted that BT Group is currently worth roughly £6.5 billion but has debts of roughly £11 billion, which hardly inspires confidence. However, there are two glimmers of light. In the first place, the UK economy may now be through the worst of the recession and business and consumer spending on telecommunications services may improve accordingly. On the other hand, it may be argued that mobile broadband will be the main beneficiary, and given that BT (unlike, for example, Sky) was long prevented from offering “bundles”, comprising fixed-wire, internet access and television services, at a single discounted price (although it could charge for them individually) on the grounds that it held too large a share of the fixed-wire market, BT is poorly positioned to take advantage. But it does at least have the opportunity since, in mid-March 2009, Ofcom at long last gave permission for BT to offer “triple-play” on the grounds that Openreach was finally delivering a level playing field.

Naturally, it is one thing to permit BT to provide cheaper services but quite another for it to take on the might of Sky in the television market. Nevertheless, it is a start and BT can now offer other “triple plays” that include mobile broadband (over leased capacity). In recent times the mobile broadband providers such as Vodafone have been offering fixed-wire broadband packages, and it may just be the case that fixed + mobile will go down better with customers than mobile + fixed.

The three-yearly review of BT’s pension scheme was due at the end of May 2009, but has been postponed for several months. According to the most recent quarterly statement for 31 March 2009, this stands at £2.9 billion net of tax, but the review will be using more stringent criteria and many predict, given the low value of the FTSE, that a deficit of roughly £5 billion net will emerge. BT has already increased top-up payments to £525 million annually, and with free cash flow providing perhaps £1 billion a year there is barely room for dividends – which means that the share price will remain depressed.

This is not good news for employees. During the financial year to end-March 2009, BT shed 15,000 jobs. Further cuts of roughly the same order are almost certain during financial year 2009/2010, and BT has already implemented a pay freeze for 85,000 permanent staff, including senior management, while cutting rates paid to contractors by up to 30 per cent.

As a result, one ongoing problem is an intransigent labour force (and its unions). Add this to an unresolved pension fund deficit, a collapse of dividends and a malfunctioning “growth” division, and BT’s future does not look bright. However, the accountants are now back in charge and the credit crunch is probably abating, so things may improve quite rapidly. Overall, it is very hard to equate this picture with the brave new world of BT’s privatization (as envisioned by Mrs T), yet fully-privatized Telefónica is doing much better so there is clearly no simple cause and effect relationship. Indeed, one may well wonder how the likes of France Télécom would have fared without both explicit and implicit state support.

It is easy enough to point to factors such as poor management, an unfocused foray into foreign parts, a hostile regulatory environment and, most obviously, the sacrifice of the mobile division (bought by Telefónica), to which may be added the current credit crunch. Some of these have been and/or remain wholly within the control of BT, some partly and some barely at all, but given that no one seems even vaguely interested in taking over the company, it will have to struggle on as best it can. Given its evident (but misplaced – see Whalley and Curwen (2008)) pride in introducing broadband throughout the land, it is difficult to feel much sympathy.

Peter CurwenVisiting Professor of Telecommunications at the Department of Management Science, Strathclyde University, Glasgow, UK. E-mail: pjcurwen@hotmail.com