View from City Road: Interference on BT's party line

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The Independent Online
British Telecommunications claims that it is facing 130 different competitors in the UK. Despite the fact that everyone must by now have heard of Mercury and every month 20,000 to 25,000 households sign up with the fast- expanding cable companies for cheap telephone services, that may come as a bit of a surprise.

But even though it is taking market share at the rate of around 3 per cent a year it will be a decade before the competition makes serious inroads into BT's dominant market position. And in the meantime Oftel is doing its best to prepare BT for the shock.

A price cap set 7.5 percentage points below the rate of inflation is tight indeed when inflation is running at currently low levels. This year it will pinch even tighter since Oftel has forced BT to bring forward its price cuts from next March to this November, in effect increasing the bite on BT's revenues from pounds 500m to pounds 750m in 1994/5.

Rising volume on the back of economic recovery is helping BT. But such is the cumulative power of years of virtual monopoly in BT's domestic marketplace that it can apparently shed labour in a continuous stream to lower costs in step with falling revenues and yet simultaneously improve services.

Indeed this year BT is taking an additional pounds 240m out of profits to top up its pension fund because of the changes to Advance Corporation Tax in last year's March budget.

Not only that. Another 15,000 jobs will go in 1994/5 but this year it will cost shareholders pounds 750m rather than pounds 500m - implying a rise in pay-offs from pounds 35,000 to pounds 50,000 a head - as BT moves to cull its management rather than blue-collar staff.

It could mean profits slip from pounds 2.7bn to pounds 2.5bn this year. But this may be the nadir and such is the strength of BT's cash flow that there will be no problem producing dividend growth 4.5 points ahead of inflation.

Nevertheless, BT's shares have fallen by more than pounds 1 this year as, in common with the gas and water utilities, its dividend yield has been pushed higher to keep pace with rising gilt yields.

At 5.5 per cent the yield is now 50 per cent above the market average. This discounts the worst, but long- term interest rates may have to fall before BT makes much further progress. And that looks most unlikely.