Will the winds of change topple BT?

The telecoms giant is performing badly, the City is confused and shareholders are getting angry

"Buy". "Sell". "Accumulate". "Outperform". "Under perform". "Hold". "Neutral". "Attractive". City analysts can't agree on what to do with BT's shares.

"Buy". "Sell". "Accumulate". "Outperform". "Under perform". "Hold". "Neutral". "Attractive". City analysts can't agree on what to do with BT's shares.

While their notes to investors differ wildly, most of agree on one thing: BT needs to pull its socks up - and quickly. In 12 months its shares have fallen almost 19 per cent, closing on Friday at 898p. This gives it a market capitalisation of £58.7bn, against the £70bn analysts estimate the business is actually worth. "Performance of the company is well below par," grumbles one institutional shareholder.

While BT executives won't take too kindly to the raft of "sell" notes, more worrying are the analysts' reports urging investors to buy. Many are justified on the sole expectation of a management shake-out or a takeover bid. Sadly for Sir Peter Bonfield, BT's 56-year-old chief executive and the 57-year-old chairman, Sir Iain Vallance, this could be on the horizon.

Last week, "kick BT" open season began. European commissioners Mario Monti and Erkki Liikanen put the first boot in when they issued proposals to force BT to open up its high-speed ADSL internet network to competition, six months earlier than BT had planned - and a terse warning that BT could end up in court if it did not oblige. Then Sir Iain faced the army of minor shareholders at the annual meeting, where he had to defend BT's poor performance. In the same week, BT admitted it was considering floating off Concert, its business telecoms joint venture with America's AT&T - a move immediately denied by AT&T.

And dissatisfaction is growing among some of BT's institutional shareholders, that include Mercury Asset Management, Barclays, Prudential, Legal & General and Standard Life. One institution, that asked not to be named, says: "BT is not working hard enough to deliver shareholder value. This should be central to Bonfield's strategy, but he seems a bit tardy on that." Another says: "The managers have a lot to prove. If they are not careful, heads could roll, starting with the chairman."

Buoyed by shareholder disaffection at Vodafone, investors in BT refuse to rule out more action, though they point out that nothing is currently on the cards. "If enough of us ganged up, then we would be a very big lever for change," says one institutional investor.

So why have BT's shares performed so badly? The first clue is its results. Last year turnover rose 10.4 per cent to £18.7bn, but pre-tax profits fell 31.5 per cent to £2.9bn. Merrill Lynch added to BT's woes last week by cutting its full-year pre-tax profits forecast by 26 per cent.

The key to this squeeze is BT's domestic fixed-phone line business. While calls through BT have risen - aided by the explosion in internet use - profits have tumbled due to price attrition. This, say analysts, is a clear sign that BT must refocus on its other revenue sources. But in some areas it's missed the boat. For example, Cellnet, BT's mobile phone division created around the same time as Vodafone, represents just 8 per cent of BT's income, while Vodafone has grown into Europe's largest company.

Because it has dilly-dallied, say City analysts, it's let competitors capture valuable space in the market and become dominant. "Investors would do better putting their money into Vodafone," says Paul Mount, telecoms analyst at Nomura Securities.

Last April BT took a brave step by reorganising its business along its product lines, and separated its UK fixed-line business into wholesale and retail. It also created four new units - Ignite, its business internet division; BT Openword for mass-market internet; Yell, that includes its holding in Yellow Pages; and BT Wireless which combines Cellnet and its international holdings - and hinted at future flotations. It was immediately rewarded with a 4 per cent rally in its shares.

But the gloss has quickly rubbed off. "The City is beginning to think the restructure was simply window dressing," says the head of corporate finance at an investment bank.

The feeling among shareholders and analysts alike is that having etched the fault lines in the business it now needs to aggressively work the units to supplement its dwindling UK fixed-line profits. It could then float off the units and, voilà, BT would have highly rated paper for large acquisitions to gain valuable market share.

One fanciful City idea is that Freeserve would make a good buy for BT. As the UK's largest internet service provider, it would complement BT's fixed-line business. But many doubt the board's appetite for such a large investment. Instead, BT seems to prefer smaller minority stakes in multiple companies. It has, for example, investments in France's Cegetel, Germany's Viag and Italy's Albacom. Nigel Hawkins, analyst at Williams de Broe, says: "In two years BT's debt has ballooned from around £1bn to £19bn with very little to show for it."

Shareholders would prefer to see BT either increasing its minority holdings to a controlling position or bailing out altogether. "What's the point in having a stake if BT has no control over it?" asks one institution.

A more immediate worry for BT's board is what is perceived as inconsistent management across its businesses. Take Ignite, the business internet unit run by Alfred Mockett. It is based at BT's old telephone exchange at Mondial House on the River Thames. Inside there is the feel of a dynamic young organisation: it has already won major contracts with Barclays and Liverpool city council.

But other parts of BT don't seem to have gelled as well. One investment banker says: "I think the problem is middle management. I actually get quite angry about it." He says some managers see the joint ventures and new units as a threat to BT's main business and so aren't as committed. "They are so slow in responding when I put ideas to them," he says. "[Now] I don't bother contacting BT when I have a proposal."

One shareholder says that he wants to arrange a meeting with BT to discuss its performance. But he's still waiting for it to come back with a date. If he doesn't hear soon then BT may well feel the full wrath of its grumpy shareholders.