MARKET COMMENT
BT in the Future

By Christopher Spink
May 23, 2001

At the moment BT (LSE: BT.A) shareholders are preoccupied with the knotty problem of whether to take up the rights offered by the present £5.9b fund-raising issue. If you want more clarification about the practical aspects of the decision then read this guide.

However, ultimately what you do will depend on how you think BT will perform in the future. This rights issue seems to have been sold in rather a lame way. BT's management has basically said they need the cash to pay off some of its £30b debts. These were accumulated through buying 3G mobile licences. At the same time the group has decided to chop this year's final dividend and next year's interim payout.

The group's basic performance over the past three years has been pretty terrible.

Y/E 31 March        1999     2000     2001
Sales       (£m)   16,953   18,715   20,430
PT Profits  (£m)    4,295    2,942   (1,030)
Earnings PS  (p)     34.2     30.5    (27.7)
Dividend PS  (p)     18.3     19.7      7.8
Net Debt    (£m)    5,000   14,000   28,000

These raw results show that while sales have risen by about 10% per year, pre-tax profits have collapsed. This is for two reasons. Firstly margins in BT's basic business have been severely reduced, partly because of restrictions imposed by the regulator OFTEL, and also by increased competition from fledgling rivals. Secondly over the same period debts have increased rapidly, forcing up interest payments and prompting the group to curtail dividend payments.

BT now has the gall to ask shareholders to help it out of this tight position. But will £5.9b be enough to transform the company's fortunes? It seems unlikely. This rights issue begins to look more and more desperate, with no strategic vision clearly outlined to inspire shareholders to take up the rights. Instead it's sold as a fix for the problems of the past. Not surprisingly BT shares, have continued to slide since they went 'ex-rights' on Monday.

This year there seems little hope BT will manage to stop its margins from falling. Shareholders seem unlikely to reap a dividend for sometime to come. All the hopes will be on BT Wireless, which, whilst loss-making, is growing revenues quickly. When this is demerged the operation will have relatively little debt shackling it. The one problem comes in deciding how much building a 3G network will cost and whether a decent return can be made from that investment. That issue is what BT shareholders will have to ponder before taking up their rights or not.

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