Has BT's dashing boss backed the right horse?

Midweek View

Chris Blackhurst@c_blackhurst
Wednesday 17 December 2014 01:24
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If we were in the habit of anointing someone “Business Person of the Year”, who would it be?

One contender would be Gavin Patterson. In two years, the chief executive who does not look like a chief executive – so good looking is he – has transformed BT. It’s now a sexy business, something that could never be said about it before: organisationally leaner, financially stronger, and a sharper mover, prepared to take on Sky at Premier League football.

Now he’s pushing to buy EE for £12.5bn. Judging by the reaction, the deal’s success is a foregone conclusion. Already, speculative eyes are focusing on Vodafone – could it join with Sky? – and O2 – is Hutchison Whampoa read to pounce?

In markets that are always scouring for the next turn, such a response is natural. There’s a tendency to regard the purchase as done, to move on.

But this is where Patterson must prove his worth; this is where the hard work begins. In rejecting O2 and choosing EE, he’s staking the house on the market leader. Buying O2 would have been cheaper and easier, but in a ballsy move, Patterson has said to hell with that, and gone for it.

As a result, he can expect a tough fightback from Sky, Vodafone, TalkTalk and the rest. They can push the regulator for all they’re worth; they can complain and harry to seek concessions – it’s good sport that won’t cost them anything.

BT is confident of early regulatory clearance. But don’t be surprised if it takes them to this time next year to negotiate all the hurdles that will be put in their way.

Even after having paid £12.5bn, allowed the Germans into his boardroom (Deutsche Telekom, which part-owns EE, gets a seat on the BT board), almost certainly ceded spectrum to obtain official approval, and battled Sky over football rights, there will still be one major challenge left. Patterson must prove the British like “quad-play”, that they’re happy to source their broadband, television, landline and mobile services from one operator. There is no evidence that this is so.

Quad-play is growing in Europe and the US, but these are defensive offerings – price-cutting bundles to stop customers switching to cheap alternative providers. Getting the British to embrace quad-play positively when, for now at least, they prefer to get their household TV, broadband and fixed line from one supplier, and their mobile from another, is Patterson’s great gamble.

Business awards have an unfortunate habit of turning into curses – one reason for not doing them. It’s too early to tell what fate would befall Gavin Patterson.

Vince should learn to mince his words

Last Friday afternoon, the skies over London felt eerily quiet. Alas, the same could not be said for the airports which were having to cope with 128 cancelled flights and 10,000 frustrated passengers.

After 45 minutes – that’s how long it took for that level of chaos to ensue – and order was restored, the predictable blame game began. It was a computer fault at Nats, the UK’s national air traffic service. Vince Cable, on Sunday’s Andrew Marr Show, went further. The air traffic controllers at Swanwick in Hampshire used “very ancient computer systems which then crash”, the Business Secretary said. He accused Nats of “skimping on large-scale investment for very many years.” Said Cable: “It’s often the easy thing to do under financial pressure to be penny wise and pound foolish and to forgo capital investment. I think the lesson for the future, in both the private and public sectors, is that we do have to maintain a high level of capital investment.”

Even ahead of any official report into the chaos, that seems cut and dried: it was all down to the penny-pinchers at Nats. They should invest in some up-to-date IT. Tightwads. Predictably, given Cable’s attack, there were calls for Nats executives to forfeit their bonuses – something they did after another systems failure a year ago.

There’s no doubt that the problem occurred in an ages-old computer system. Management has said it was in a part that was designed in the 1990s. They reject, however, that its vintage was responsible, maintaining that the oldest technology is often the most reliable.

The point is also made that Nats’ record is no worse than its European equivalents – they too suffer similar outages, typically one or two annually. Given the intensity of flights to and from Britain – 6,000 aircraft fly through our airspace every day – the occasional breakdown is to be expected.

Nats has spent more than the German air traffic control over the past five years, and has received the go-ahead to invest £575m in new technology in the next five years.

None of which points to an organisation that is sitting doing nothing and not moving with the times, as Cable suggested. There was more that Cable could have said, however.

How about if he’d pointed out that Nats is 49 per cent owned by the Government, that the company was saddled with debt to pay for its part-privatisation in 2001, that 46 per cent of the business went to a consortium of airlines who paid just £50m to “partner” the Government, and that it’s in the interests of those carriers to keep down charges to their customers and therefore the amount that the air traffic controller could levy if, say, it wanted new computers?

I would love to see the records showing how the 49 per cent shareholder – Cable’s department – has repeatedly called for capital spending on upgraded equipment, only to be shouted down by the horrible 51 per cent. Presumably such documentation exists, or else he would not have said what he did on Andrew Marr, would he?

The Nats sell-off was a botched job from the very outset. The then Labour government chose to pump up Nats’ debt from £330m to £733m to cover the sale proceeds. The 51 per cent was valued at £758m. Controversially, the bulk of that came, not from the purchasers of the 51 per cent, but from a loan taken out by Nats (the company borrowed £733m, of which £330m was used to repay outstanding loans to the Government, and the Treasury pocketed £428m net). That borrowing has to be paid back to the banks, with interest, by Nats.

Remarkably, the Government’s private sector partner in the deal, the Airline Group of airlines, paid just £50m for a 46 per cent share in Nats, with the other 5 per cent held by the staff.

The result of the sale was a company groaning under debt, with some unlikely shareholders who would naturally prefer to see passenger duties remain low rather than see them rise. Whatever Cable says, that was not Nats’ doing.

In his rush to judge, the Business Secretary picked the easy target. In reality, thanks to a previous government, the story of Nats is a lot more complicated than that.

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