A qualified thumbs-up for Sir Peter's revamp

BAA monopoly; Capital Radio
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The Independent Online

British Telecom is billing it as the most radical restructuring since privatisation. Long in the making but still relatively short on detail, will it be enough to reverse BT's flagging fortunes? Negative, would seem to be the City's initial response. BT's shares were marked down nearly 5 per cent yesterday and to some extent the knee-jerk response is justified. There was very little flesh on the bare bones of yesterday's proposals, and as a consequence, plenty of ammunition for those who claim they don't go far or fast enough.

British Telecom is billing it as the most radical restructuring since privatisation. Long in the making but still relatively short on detail, will it be enough to reverse BT's flagging fortunes? Negative, would seem to be the City's initial response. BT's shares were marked down nearly 5 per cent yesterday and to some extent the knee-jerk response is justified. There was very little flesh on the bare bones of yesterday's proposals, and as a consequence, plenty of ammunition for those who claim they don't go far or fast enough.

The interim dividend is held, but what will become of it once the new holding company with its six satellite businesses comes into existence next year? Not saying, was Sir Peter Bonfield's response yesterday, though we all know what the answer might be. Indeed, the BT chief executive is not saying much about the future at all other than to give the broad outline of the structure he wants to put in place.

The most obvious criticism is of the holding company structure itself. If it makes sense to create six stand-alone businesses, so that they can more quickly and flexibly respond to their chosen markets and technologies, why not go the whole hog and break the company up entirely? What's the point of shilly shallying around with partial flotations but with all the moving parts kept within the same mothership?

The justification offered is not wholly convincing. According to Sir Peter, scale is of itself still important in telecommunications. Other benefits include shared customer systems, cross fertilisation of ideas and technology, shared infrastructure costs and access to cheaper capital. Oh, and he also plans to continue using those businesses with strong cash flow to bolster those in need of heavy investment.

Unfortunately, he doesn't properly explain how this would work in practice. Once a company is established as an independently quoted entity with outside shareholders, it cannot be treated as a milch cow for other parts of the business. If Sir Peter gains regulatory approval to float Netco, the telecoms infrastructure company, there would be severe restrictions on his ability to exploit it for the benefit of other parts of his empire. BT could draw dividends on the same basis as other shareholders, but no more. If Sir Peter has found a way round these contradictions, he is not prepared to say what they are.

Furthermore, there remains big questions about the feasibility of separating retail from wholesale without destroying shareholder value. Sir Peter is right in thinking that once free of retail, Netco could be made into a strong growth business, though his prediction that it might more than double revenues in five years seems a little optimistic. Nonetheless, the separation might be a death warrant for retail, which forced to buy capacity from Netco on the same basis as everyone else will struggle to hold anything like its present market position. Another contradiction which isn't properly addressed.

But Rome was not built in a day, and perhaps the most important thing about yesterday's announcement is that it shows BT is at last beginning to think what even a year ago it was still dismissing as quite unthinkable. We are at the start of a two to three-year story here, at the end of which BT will almost certainly look a lot different from the limited restructuring announced yesterday.

For the time being, there continue to be regulatory constraints on exactly how far BT can go. Debt holders would also scream blue murder at a more root and branch breakup. But the City is in any case being churlish in dismissing these proposals as not radical enough, and of evidence that the BT old guard still reigns supreme. By an order of magnitude, they are a good deal more radical than any other major telco is proposing, and as a consequence not without their dangers.

The evolution from integrated utility to series of faster moving growth companies is going to be an exceptionally difficult one to achieve. Even so, it is one that BT must eventually effect if its shareholders are going to salvage anything from the wreckage of deregulation and rapid technological change. In an age of ever increasing competition in telecommunications, the logic of separating out the core regulated utility, in the way British Gas did with Transco, is indisputable, and other former state monopolies will have to follow suit. Yesterday's proposals are not an end in themselves, but they do position the company a little ahead of the curve.

BAA monopoly

John Prescott has bigger fish to fry than the British Airports Authority. He has a fuel protest to put down and a Railtrack boss to unseat. So it was not altogether surprising that he has let BAA off the hook by deciding not to break up its monopoly over the three south-east airports, Heathrow, Gatwick and Stansted.

The Government's review of airport competition was half-hearted from the moment Gordon Brown announced it to general bemusement in last year's Budget. Hardly any evidence was ever taken and yesterday the DETR could not even produce a report of the review, which rather suggests that Mr Prescott got his advice on a single sheet of A4. In deciding against a breakup, the Deputy Prime Minister has accepted BAA's contention that Heathrow dominates because it is an airport of choice for passengers, not because BAA abuses its monopoly of alternatives to make it so.

If BAA is allowed to maintain its monopoly of the capacity, the next best thing Mr Prescott can do is allow market forces a greater say in how it is allocated. That is precisely what the Government is now proposing with its recommendation that existing take-off and landing slots should be traded and new ones auctioned. The auctions would have the added bonus of being worth perhaps £1bn a year to the Government.

At Heathrow, this will favour those airlines with the deepest pockets, disadvantaging regional operators. However, that might be mitigated by the Prescott review's other recommendation - a re-examination of the antiquated system of grandfather rights, which allow airlines to hang on to slots in perpetuity. The proposals are an acknowledgement of what already happens behind closed doors in smoke-filled rooms at IATA scheduling conferences, where slots are traded for money. Unfortunately, none of this can happen on a fully-blown basis without the blessing of Brussels. That suggests change will be a long time coming.

Capital Radio

Is there life after Chris Tarrant? Mr Tarrant is part of the culture of Capital Radio and his morning shows are almost certainly its single most lucrative source of revenue. But his contract is fast running out, and there must be a limit even to the energetic Mr Tarrant's ability to keep getting up at five in the morning. Presumably Capital will find a way of keeping him on board in some shape or form - a lorry load of share options always helps - but it has already reconciled itself to losing him in the early morning slot. David Mansfield, Capital's chief executive, insists the company is bigger than the man. We'll see.

* outlook@independent.co.uk

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