At first glance, it looks like one of the stock market’s all-time over-reactions. BT says a tawdry scandal at its Italian business will leave its earnings £300m lighter than its previous £7.9bn estimate – less than 5 per cent of the total – only for the company to see £6bn disappearing from its market value as its shares fall by more than 17 per cent.
The reason for the slump is that there is a lot more going on here than just the Italian snafu, and investors’ (probably justified) fear that it will very likely end up costing them rather more than that £300m in profits when the dust has finally settled.
For a start, look at the timing of the profit alert. It comes just three days before BT’s scheduled third quarter results announcement on Friday.
Unexpected news that is sufficiently bad that it just can’t wait a few days always, but always, spooks the City, and with good reason.
Then look at at what the announcement says. The Italian job is indeed a bad one: Accounting irregularities, suspensions, a need to adjust past results as well as those estimates for the future. It is the sort of thing that, sooner or later, tends to attract the attention of authorities with the power to impose penalties. These could further impact BT’s results.
But the key paragraph, the real nasty, comes about three quarters of the way down the statement released to update investors on the Italian issues.
It is this: “Looking ahead, however, the outlook for UK public sector and international corporate markets has deteriorated.”
BT explains that this will mean a double-digit decline in fourth quarter earnings, not including any one-off charges, and revenues that will likely be flat for the next couple of years “on the basis of our existing investment plans”.
As businesses typically do, BT has sought to provide a little reassurance to its investors at the end of the bad stuff. It promises to continue growing its dividend by “at least” 10 per cent a year. So don’t worry too much, you big institutional shareholders, you’ll be ok. If you’ll just bear with us while we sort out the mess, we’ll keep throwing money at you.
Now, what might your response to that be if you work within Prime Minister Theresa May’s newly interventionist Government?
You have just made all sorts of gaudy promises about your new industrial strategy that you have said will keep Britain afloat after Brexit has decimated the City. You have promised, among other things, to make the UK a tech leader.
And yet here you have BT planning to increase its dividend by 10 per cent a year, based on current investment plans, at a time when the UK’s digital infrastructure has been compared to that of Albania's and Peru's by your own infrastructure commission. Not at all favourably.
Given that, you might very well start to ask whether those investment plans that BT references are sufficient, and whether it isn’t time for the company to do rather more than it is planning to do at present, particularly if it wants to keep its hands on OpenReach, which oversees Britain's broadband infrastructure. Rivals, needless to say, think it should be spun off and Ofcom isn't exactly happy.
The public, which has just started to digest the price rises that BT announced on Friday, might be quite supportive of a Government which takes a more assertive line with BT than has previously been the case.
BT clearly has some serious issues to deal with in Italy. But its real problems might just lie closer to home. And they might just be getting started. As for the £6bn that has been wiped from the value of the company? It's no over-reaction if I'm even half right.
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