City pressure mounts on Bonfield for BT break-up

Dismembering the telecoms giants could unlock £90bn for long-suffering investors
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Is a break-up of British Telecom moving up the agenda of institutional shareholders, regulators and board members of the company itself?

Is a break-up of British Telecom moving up the agenda of institutional shareholders, regulators and board members of the company itself?

In recent days, BT has been shoved this way and that. First, its credit rating was put under review pending a downgrade and then its expensive internet access packages were accused, again, of retarding the nation's e-commerce development.

Meanwhile, thousands of small private shareholders, not to mention big institutions like Mercury Asset Management, which has a £1.6bn stake, have been badly hit as the stock, down a further 14p yesterday to 796p, repeatedly sinks to two-year lows. Indeed, £1,000 invested in BT on 1 January is now worth just £524.

Commenting on BT, one fund manager, whose firm owns over £500m worth of stock, yesterday said: "There's quite a lot of pressure in the home market domestic business. When you compare BT with some European telcos, whether in developing mobile or internet businesses and floating them, BT has been slower off the mark."

Officially, BT's structure is under review with a year-end deadline to determine whether flotations of component business will go ahead. But yesterday's announcement by ratings agency Standard & Poor's that BT's prized AA+ credit rating has been cut to A has served to underline the necessity of disposals and flotations to cut the company's £30bn debt mountain.

S&P's downgrade of BT's credit worthiness caused the company to cancel a marketing roadshow to promote a $10bn bond issue. Ironically, it follows last week's generally applauded move to spend £9.2bn to double its stake to 90 per cent in Viag Interkom, the German mobile and fixed-line operator, as well as secure a third-generation mobile phone licence. If the Viag investment is hefty, it remains the case that several recent telecoms deals, such as Deutsche Telecom's $50bn purchase of VoiceStream Wireless of the US, have been considerably more expensive.

Analysts believe the Viag deal is significant for two reasons.

First, it is a coherent progression of BT's original strategy to use declining domestic market profits to expand via minority stakes in fast growing sectors abroad. Moreover, Viag gives BT the opportunity fully to exploit a controlling interest in Europe's largest economy where mobile growth is expected to enter a catch-up phase as German market penetration approaches the higher rates seen in the UK, Italy and elsewhere.

For those reasons, the Viag deal is seen to presage a flotation sometime next year of BT Wireless. The unit includes Cellnet, Britain's number two mobile operator with 9 million customers, as well as wholly owned businesses in the Netherlands and Ireland. In addition, BT has minority mobile stakes in Italy, France, Canada and around 10 other countries. Some of those stakes, notably in France and Italy, will be targeted for expansion, while others will likely be sold off.

Sean Johnson, an analyst with SG Securities, says: "Acquiring Viag means they'll have to consider spin-offs. There's not really a problem with the gearing, but there could be with the credit rating. There may be surprises when they announce what they're going to sell or float."

The likely outline of a dramatic overhaul of BT came sharply into focus in April when the former state-owned monopoly undertook steps to transform itself into six distinct divisions (see table). The complexity of the reorganisation - BT has 21 million account holders and annual revenue of £15bn - means that the new divisions won't issue operating results until the current financial quarter is reported in November.

Until then, however, BT will have to soldier on, perhaps hoping that an anticipated autumn rebound in telecoms and technology stocks will relieve pressure on the company's management. Conversely, should markets worsen this will intensify the focus on the communications skills of BT's top three managers: chairman Sir Iain Vallance, chief executive Sir Peter Bonfield and finance director Robert Brace.

Although all three are well known in the City many institutions feel BT has done a poor job of keeping investors informed. This criticism is coupled with a general perception that despite 16 years as a public company, BT has yet to completely shake off its erstwhile bureaucratic middle management mentality.

One institutional investor, whose stake in BT has lost nearly £1bn in value, notes: "The point is investors don't know what's going on and this being the case you worry about whether there is a coherent strategy. We are horribly in the dark about what the strategy really is except in general sound-bite terms." He adds: "Other companies are better at making their direction clear and what the parameters for their decision making are."

If a dismal stock market performance was the only issue, BT's current predicament, while serious, would not amplify too loudly beyond the City. But Prime Minister Tony Blair's determination to put Britain at the forefront of the e-commerce revolution - something of a vain hope it would now seem - has served to highlight BT's reluctance to embrace new technology, now commonplace in North America, that dramatically improves internet usage.

The technology known as asymmetric digital subscriber line or ADSL was tested for several years during the mid-1990s in East Anglia and elsewhere. BT had planned to start offering its own ADSL service in July after numerous earlier delays. To-date, however, ADSL has yet to launch.

Germany, which only liberalised its telecoms networks in 1998, has now surpassed Britain in the roll out of high speed internet infrastructure and access. Deutsche Telekom, though still controlled by the German government, has 65,000 ADSL subscribers, a number that is growing by 4,000 per week.

The contrast with BT's muddled roll-out was made in a recent report by ABN Amro analyst Edwin Lloyd. "By comparison, BT has been relatively slow in rolling out ADSL, with just a handful of customers so far." He added: "BT is protected because it will not have to unbundle the local loop until July 2001, seven months after the rest of the European Union."