BT Rejigs Consumer Biz as Profits Hit by £225M Italy Payout

BT puts EE boss in charge of a consumer division that will include all fixed and mobile activities, but shares fall in the operator after it takes further charges related to its Italian accounting scandal.

Iain Morris, International Editor

July 28, 2017

8 Min Read
BT Rejigs Consumer Biz as Profits Hit by £225M Italy Payout

BT's profits have taken a further battering with the company paying £225 million ($294 million) to Deutsche Telekom and Orange to ward off any litigation following revelations of an accounting scandal in Italy earlier this year. (See Dodgy Italian Job Savages BT Earnings, Share Price Tanks.)

Both European operators took stakes in BT Group plc (NYSE: BT; London: BTA) when they it sold their mobile joint venture EE for £12.5 billion ($16.3 billion, at today's exchange rate) last year. But those investments took a big hit when the accounting scandal came to light, with Orange (NYSE: FTE) selling some BT shares at a loss and Deutsche Telekom AG (NYSE: DT) writing down the value of its 12% stake by €2.2 billion ($2.6 billion).

The £225 million ($294 million) payment is intended to prevent Deutsche Telekom and Orange from taking legal action against BT that could have proven much costlier.

"This represents a full and final settlement with them," said BT CEO Gavin Patterson during an earnings call with analysts. "This is disappointing but it is the best possible outcome for shareholders and avoids litigation and market uncertainty."

Figure 1: BT's Gavin Patterson: Settlement 'is disappointing but it is the best possible outcome for shareholders.' BT's Gavin Patterson: Settlement 'is disappointing but it is the best possible outcome for shareholders.'

In the April-to-June quarter (BT's first), that payment was largely responsible for a 42% fall in profit before tax at the fixed-line incumbent, to just £418 million ($547 million), compared with the year-earlier period.

At the time of publication, BT's share price was trading down about 2.3% in London on the update and is currently about 17% lower than at the start of the year.

BT's results were savaged by the Italian scandal in January when the UK's former state-owned monopoly said a write-down would cost it as much as £530 million ($693 million), up from a previous estimate of £145 million ($190 million).

As a result of those costs, and a gloomy outlook in some of its public sector and enterprise markets, BT does not expect to grow sales in the current financial year, which ends in March 2018. Adjusted earnings (before interest, taxation, depreciation and amortization) are expected to be £175 million ($229 million) lower than previously expected, at between £7.5 billion ($9.8 billion) and £7.6 billion ($9.9 billion).

Thanks to continued growth at its consumer-facing businesses, BT was able to report year-on-year sales growth of 1% in the first quarter, to about £5.8 billion ($7.6 billion), although investment activity, including spending on TV content, triggered a fall in profits at the BT Consumer division, which sells fixed-line services to residential customers.

Revenues at BT Consumer rose 7%, to just under £1.3 billion ($1.7 billion), while operating profit fell 4%, to £180 million ($235 million). EE reported a 4% increase in revenues, to £1.3 billion ($1.7 billion), and a 74% rise in operating profit, to £146 million ($191 million), thanks partly to lower indirect costs in a handset market it said was "slowing."

In a move aimed partly at reducing Group costs, BT said it would merge BT Consumer with the EE mobile business, which until now has been managed as a separate entity under the leadership of CEO Marc Allera.

From September, Allera will become head of a new-look consumer group managing three brands -- BT, EE and Plusnet, BT's low-cost broadband offer.

The restructuring also hints at a bigger push on the sale of "converged" services that package various fixed and mobile services in a single bill. BT is looking to boost customer spending and loyalty in anticipation of a looming slowdown in broadband growth in the next two years.

Having been with BT for 13 years, John Petter, the current head of BT Consumer, is to quit the company. He becomes the latest senior executive to leave BT following the departure of several other key executives in the wake of the Italian accounting scandal.

BT confirmed reports earlier this month that Sean Williams, its chief strategy officer, is also moving on. Cathryn Ross, the current chief executive of water sector regulator, will effectively replace Williams when she takes up a new role as BT's director of regulatory affairs in January next year. (See Eurobites: BT Tools Up for Regulatory Battle.)

Next page: Growing fiber appetite

Growing fiber appetite
Dealings with UK regulatory authority Ofcom will be of huge strategic importance to BT over the next few years as it eyes a much bigger investment in fiber broadband infrastructure.

Under current plans, the operator aims to cover about 10 million UK premises with a technology called, which boosts connection speeds on its last-mile copper lines, and another two million with fiber. Those higher-speed services are now available to around 550,000 homes, said Patterson, and more than 100,000 customers are using them. (See BT to Cover 2M Homes With FTTP in $8.7B Plan.)

But in mid-July its Openreach infrastructure business said it was considering the viability of building an all-fiber network covering about 10 million UK premises by 2025.

"We are well placed to support a larger deployment of FTTP [fiber-to-the-premises] but the infrastructure investments are significant and will take time to deliver and we need a regulatory framework that incentivizes investment," said Patterson on today's call.

BT's concern is that Ofcom will force it to open its network to rivals on terms that undermine the investment case, while other broadband stakeholders are worried that an FTTP plan could lead to BT's "re-monopolization" of last-mile access networks.

The rollout of gigabit broadband access networks is spreading. Find out what's happening where in our dedicated Gigabit Cities content channel here on Light Reading.

BT's relationship with Ofcom has at times been difficult and authorities last year mandated the "legal" separation of Openreach, despite fierce opposition from BT, in a move aimed largely at improving conditions for BT's wholesale customers and retail rivals. Although Ofcom was already a distinct division within BT, it is now supposed to be run at arm's length from the rest of the Group, with its own management. Several competitors had demanded a more stringent "structural" separation, which would have made Openreach an entirely separate company, but have broadly welcomed the move. (See Only BT's Dismemberment Will Sate Rivals.)

Despite various setbacks, BT recently had good news on the regulatory front when the UK's Competition Appeals Tribunal (CAT) this month rejected an Ofcom plan to make BT provide "dark fiber" services in the business market.

Many of BT's wholesale customers currently rely on leased lines, but dark fiber promises to give them more control over connections. A panel of judges, however, ruled that Ofcom had wrongly defined the leased lines business and failed to consider existing levels of competition in parts of that market, among other things. The ruling will force Ofcom to redraw its plans. (See Vodafone, 3 Plot UK Fiber Moves Amid Rules Shake-Up.)

"I think it's too early to say what will happen from here and we need to see the full judgment to see how the CAT came to its conclusion but at a headline level we are happy because we felt some decisions were made in the wrong way," said Patterson.

Insisting that BT's relationship with Ofcom was improving, Patterson nevertheless described the regulator's current stance on wholesale price as a "disincentive" to investment in FTTP.

"The prices they are proposing we think will not be good for the market -- we won't be able to make a cost of capital return and it will disincentivize investment in FTTP… and undermine everyone's business case," he told analysts. "But there is an open discussion with Ofcom and they are listening."

Next page: Broadband slowdown

Broadband slowdown
Despite sales growth at the consumer business, there was evidence of a broadband slowdown, with the number of net additions reported by Openreach falling to just 36,000 in the quarter from 95,000 a year earlier. Openreach's own sales were up 1%, to £1.3 billion ($1.7 billion).

Patterson acknowledged that BT is facing broadband "saturation" in the next couple of years and said the operator was now focused on increasing average spending per user among existing customers to improve profitability.

In other lines of business, enterprise and public sector sales fell by 4%, to £1.1 billion ($1.4 billion), while revenues from wholesale customers and ventures dropped 5%, to £492 million ($643 million).

BT reported a "flat" sales performance at the global services operation that was the source of its problems in Italy, generating revenues of £1.2 billion ($1.6 billion) in the quarter. But it said "underlying" sales were down 7% and flagged a 16% fall in order take because of "changing international corporate market conditions."

In May BT announced plans to cut 4,000 jobs, or about 4% of its workforce, indicating that its axe would fall on staff at global services and within various back-office operations. The goal is to make global services a more streamlined and asset-light business with a focus on digital transformation. (See BT Cuts 4% of Jobs, Plans Global Services Overhaul.)

"We are moving ahead on restructuring with a focus on multinational customers and looking to help customers move to the next generation of technology," said Patterson on today's call when asked for an update on the global services strategy and the divestment of some assets. "We are looking at whether we have the right assets mix and global services is the same as any other business in that respect."

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

Read more about:


About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

Subscribe and receive the latest news from the industry.
Join 62,000+ members. Yes it's completely free.

You May Also Like