British Telecom's headquarters stand almost next door to St Paul's Cathedral and within spitting distance of the main powerhouses of European finance. But the characterless Seventies block has fallen victim to the worst of town planning and appears cut off from the rest of the City of London by a perpetual traffic jam on Newgate Street. This sense of isolation is not helped by the refit ordered by Sir Iain Vallance before he left this year, which means the office's entrance hall is clogged up with builders. No wonder Sir Christopher Bland wants to quit the place.
He also wants to quit the mobile phone business. But the demerger of the dreadfully named mmO2 shows a similar relation between BT and the City. They appear close, but ultimately there is a gulf of understanding. Today, at least, BT has at its helm two people with a history of being able to deliver what the City wants – value-enhancing deals. Sir Christopher made multiples of original investments for anyone who stuck with LWT. Philip Hampton took sleepy British Gas, broke it up and gave us the racy Centrica, the exciting BG and the solid, but dependable, Lattice.
With BT they are attempting to deal with three issues; heavy debts, regulatory discord and City distrust. Their strategic outlook appears correct, but the short- and medium-term tactics are confused.
Before we get to mmO2, we should look at the £2.3bn property sell-off BT is negotiating with another curiously named company, Telereal. These talks are progressing about as quickly as a Virgin Train (sorry, Mr Bowker). And while BT has been in the talks not only has it reduced its debts through other means, but world interest rates have fallen. Almost all BT's debt is on variable rates, so it is in a much better position than it was. If BT was still in the public sector – and the way it is run, you often think it still is – there would be a value-for-money test applied to this deal. I'm not sure it would pass. BT would lose face in the City if this deal fell apart, but it might make sense in the long term.
As for mmO2, BT is following the route taken by its European counterparts, France Telecom and Deutsche Telekom, in demerging their Orange and T-mobile businesses respectively. Whether this is the right route might be open to debate. Conventional wisdom is that demergers incentivise management and appease regulators and so are a good thing. But conventional wisdom has so often been proved wrong in telecoms that I fear to commend it. Assuming demerging mmO2 is the right thing, the timing has to be wrong. Even before 11 September, there was a global TMT slump that depressed mmO2's value. Since the New York and Washington disasters there has been added uncertainty which has made valuing businesses prohibitively difficult. The City's range of expected share prices for mmO2 – starting at 125p and falling all the way to 70p – reflect this.
Even if the market was ready for mmO2, the company isn't ready for the market. It is not one business or one brand, but four separate entities at different stages in their business development. None are market leaders; indeed, the German operation is a distant fourth out of four in its market, and Cellnet appears to be losing ground in the UK. I'm willing to believe Peter Erskine is a brilliant manager, having trained at Mars. But if you think you can get clarity from business in four different orbits, you are from Venus. There is an argument, though, that none of this matters. It's a demerger, after all. Unlike Orange, mmO2 is not raising fresh cash so timing is not that critical for shareholders who will end up with a mmO2 share certificate to stick in the drawer with their BT one.
But this is the sort of argument put forward only by people who are remote from the workings of the City. Imagine how credible mmO2 would be if, within a few months of demerging, it admitted to delays in its strategy because of integration. And what would be the prospects for a better-integrated, more stable mobile phone group with a decent track record floating on a recovering market next year?Reuse content