BT divides into six businesses in biggest shake-up since privatisation

British Telecom unveiled a wide-ranging reorganisation yesterday marking the biggest shake-up undertaken by the company since its privatisation in 1982.

Amid concern that BT's lagging share price has made it vulnerable to a takeover, chief executive Sir Peter Bonfield announced plans to split its UK wholesale and retail fixed-line operations by year-end, create four new business units, one of which, the Yellow Pages operation, will be floated later this year with a price tag estimated at between £5bn-£10bn. Each new unit will be headed by a new chief executive with a new management team. This is expected to double the number of senior managers on incentive schemes to around 1000.

Explaining BT's criteria for issuing separately quoted stocks, Sir Peter said: "Where there is a sustainable benefit ... then list the business. It's not about getting a short-term pop in our share price."

Investors thought otherwise, pushing BT shares up 44p to 1133p, valuing the company at £74bn. Other listed telecoms competitors saw their shares lose ground. "This is a complex change," said Sir Peter in response to criticism that the company has embraced change too slowly in the fast-evolving communications market. "Nobody else has done this and it will take some time."

He denied that the plan was a last-ditch bid to stave off a take-over. "This is not rearranging the deck chairs," he said. "This is a radical reorganisation of the company and I think most people will see it that way."

Analysts welcomed the moves, but said they had been a long time in coming. "It's a positive piece of news, but probably a little late," said Richard Jagger at Prudential Bache. "If there are disappointments it is that some IPOs are to be delayed," noted Karen Egan at Lehman Brothers.

One management casualty of the reorganisation is Bill Cockburn, managing director of BT's UK operations. He will assist in the transition, but will retire when the process is completed towards the yearend.

In a move to begin consolidating its many minority international interests, BT said it would take 100 per cent control of Dutch mobile and internet operator Telfort by paying £1.2bn for the 50 per cent stake held by railway operator Nederlandse Spoorwegenin. BT also unveiled plans to spend £4bn over three years to build internet-related businesses and services.

Upon completion of the revamp, BT is likely to seek flotations for the three other new business units which will be organised around product functions rather than by geographic areas of operation. The biggest is BT Wireless, to be headed by Peter Erskine, which will combine its mobile assets in 14 countries including BT Cellnet. Ignite, the second largest new unit, will be led by Alfred Mockett and will group together BT's wholesale and corporate broadband internet interests in the UK and abroad. BTopenworld, to be headed by Andy Green, will refashion the company's mass market retail Net business and move to build market share in the residential broadband market. Yell, which combines directory and e-commerce applications like yell.com, will be headed by John Condron.

Potentially the most far-reaching change is the plan to split BT's UK fixed line business, which accounts for around two-thirds of its annual sales of £17bn, into wholesale and retail arms by year-end. This would see charges for wholesale network services and call connection subject to continued regulation by Oftel. But branded retail services could be positioned outside the regulatory system, freeing BT to speed product innovation and improve operating profit margins. "We think Oftel will focus more on the wholesale business," said Sir Peter. "The retail business will be governed by the Competition Act."

Oftel expressed measured approval of BT's plans to simplify its operations: "Transparency is a key component of effective competition." The watchdog is studying future controls on retail price and network charges.

In the near-term, BT residential customers will see little change, but the company hopes the new structure will spark innovation. "What we think customers will see is faster product development and (with economies of scale) further price cuts," said Sir Peter.

Robert Brace, finance director, said the revamp would cost less than £50m. He denied the investment spending would lead BT to cut its dividend, but said the current 2:1 cover of dividend payments with profit could in the short-term see "an extra bit of strain."