BT prompts frenzy in telecoms shares on bumper profits news

Sector catches light amid bid speculation and hopes of an explosion in Internet and data traffic

TELECOM STOCKS roared ahead yesterday, boosted by strong second- quarter earnings from British Telecom (BT) and continued speculation linking Vodafone Airtouch with a hostile bid for Mannesmann, the German telecoms group that is buying Orange for pounds 18.5bn.

The sector caught fire after BT unveiled three month to September profits of over pounds 100 per second in the three months to September as underlying operating profit grew 5 per cent to pounds 1.02bn.

BT stock bounced 9.3 per cent to an all-time high of 1,254p, while sector laggard Cable & Wireless rocketed 17 per cent to 780.5p, amid Asian reports that the company's Hong Kong subsidiary could be sold.

The gains capped a stunning 42 per cent advance for the UK telecoms subsector since 8 September. Mobile stocks have driven much of that advance, although yesterday investors shifted their attention to fixed-line operators whose prospects offer more immediate exposure to the Internet. Orange gained 51p to 2,200p yesterday, while Vodafone Airtouch, which continues to ponder a hostile bid for Mannesmann, fell 3.5p to 317.25p.

BT said that group sales, bolstered by booming mobile and Internet use, and healthy gains in other business areas, jumped 13 per cent to pounds 4.7bn. Including BT's stakes in overseas ventures, where sales more than doubled, turnover climbed 21 per cent to pounds 5.33bn.

"There is no doubt the data wave is well and truly here," BT's chief executive Sir Peter Bonfield said. He estimated that around 25 per cent of local call minutes billed by BT are now for Internet use.

Sir Peter said group investment, which is to rise 20 per cent to pounds 3.6bn in the current fiscal year, would continue to target the mobile and Internet sectors. "I think we have got into a different growth plane," he said. "The flipside is that it's extremely competitive ... and there will be continued pressure on margins."

Comments from Sir Peter about further merger activity across Europe also sparked investor demand. "There will be further consolidation in Europe over the next two or three years," he said, while refusing comment on talks BT is believed to be having about raising its 45 per cent stake in Viag Interkom, a start-up German mobile and fixed-line operator. Such is the pace of change in telecoms, Sir Peter pointedly stopped short of ruling out hostile takeovers should that be needed to safeguard BT's strategic position: "It's not our policy - so far."

Analysts interpreted the telecoms stock price surge as further recognition of fixed line operators' rosy growth prospects. "What no one understands is that these companies are going to be making far more money in three years' time," said Terence Sinclair, analyst with Salomon Smith Barney. "We are in the very early days of a transformation of the telephone industry where data and Internet products become much more important."

Although BT earnings, in recent quarters, have benefited dramatically from the on-line explosion, Sir Peter sounded a cautionary note about the sweeping changes confronting the company. "We are still trying to learn the dynamics of the Internet," he said.

BT is increasingly targeting the Internet for expansion abroad, a move underline by the international joint venture agreed Wednesday with LookSmart. Yesterday Sir Peter said BT would consider buying Internet service providers abroad, although he noted that "it is a market that depends on the regulatory situation".

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