Sunday, 26 February 2017

BT revisits 2008 with Global Services in crisis, a huge pension deficit and a backdrop of economic uncertainty

By Nick Wood, Total Telecom
Friday 27 January 17

Gavin Patterson has his work cut out to restore order and trust in the U.K. incumbent's enterprise arm. Again.

I'll start off this week's Friday Review by conceding that the headline is perhaps a bit harsh on BT; it overlooks the progress the U.K. incumbent has made since 2008 in modernising its consumer unit by growing its TV business and buying its way back into mobile with EE. More later about how that's all going. This week's revelations about BT Italy though, coupled with the telco's sizeable pension deficit, and uncertainty about corporate and public sector spending, certainly were reminiscent of the difficulties BT faced in 2008. The company on Tuesday revealed that the extent of improper practices at its Italian arm was much bigger than first thought…

I'll start off this week's Friday Review by conceding that the headline is perhaps a bit harsh on BT; it overlooks the progress the U.K. incumbent has made since 2008 in modernising its consumer unit by growing its TV business and buying its way back into mobile with EE. More later about how that's all going.

This week's revelations about BT Italy though, coupled with the telco's sizeable pension deficit, and uncertainty about corporate and public sector spending, certainly were reminiscent of the difficulties BT faced in 2008.

The company on Tuesday revealed that the extent of improper practices at its Italian arm was much bigger than first thought, leading BT to increase the writedown in the value of BT Italy to £530 million (€613.8 million) from £145 million in October. BT also lowered its revenue and earnings outlook for the rest of this financial year and for next year too.

Heads have rolled, the most senior one being Corrado Sciolla, who was in charge of continental Europe for BT Global Services.

A spokesman confirmed his departure in an email to Total Telecom on Friday, simply saying: "this happened on his watch."

Reuters reported on Wednesday that BT Global Services CEO Luis Alvarez will take on Sciolla's responsibilities.

The CEO of BT Italy Gianluca Cimini and his COO Stefania Truzzoli are also out the door; a new CEO is due to start at the beginning of February.

Rewind the clock back to late 2008, and Global Services' then-CEO Francois Barrault quit after around 18 months in the job, after it emerged that while order intake was healthy, costs had spiralled out of control, resulting in huge operating losses.

The value of Global Services was written down by more than £1.5 billion, and group CEO Ian Livingston axed thousands of staff and restructured the division in a bid to get to grips with the crisis.

The situation was compounded by both the financial crash – BT was already in the middle of an £800 million cost-cutting programme when the problems at Global Services came to the fore – and the company's ongoing issues with its pension deficit, which stood at £9 billion at the end of 2008.

The situation is similarly complex this time around. While the Italy scandal steals the headlines, Global Services is also seeing a slowdown in corporate spending – particularly in the Americas – and BT is also struggling to replace revenue lost from lower public sector spending. It is also worth noting that BT's net pension deficit was still more than £9 billion at the end of 2016.

"The problem is clearly much bigger than Italy," said David Molony, practice leader, network and cloud services, enterprise, at Ovum.

According to BT's fiscal third quarter financial results, published on Friday, revenue at Global Services excluding transit costs and EE, fell 7% year-on-year to £1.40 billion. Revenue excluding transit costs and EE at BT Business and Public Sector was down 6% to £1.19 billion.

"Challenges in the public sector remain substantial as we have a small number of large contracts coming to an end. We're experiencing a faster wind down than we expected and the current market is not providing the opportunity to replace these with profitable new business," BT said.

"You could say they were trying to take the heat off the Italian operational issues, which you might expect. But they had a point," noted Molony.

BT's current CEO Gavin Patterson on Friday reiterated his disappointment with the "unacceptable practices" at BT Italy, saying it "undermines the good work we're doing elsewhere."

He pledged to ensure "the highest standards across the whole of BT," and has commissioned a broader review of its financial processes, systems and controls.

As previously mentioned, issues at Global Services and Business and Public Sector overshadowed what was a solid performance by BT Consumer.

Consumer revenue was up 4% year-on-year to £1.26 billion, as BT added 83,000 retail broadband customers during the three months to 31 December 2016. Fibre net additions came in at 260,000 taking its total customer base to 4.7 million. Its TV base increased by 52,000 to 1.7 million.

BT's EE unit generated revenue of £1.31 billion, up 2% on a year ago, and added 276,000 postpaid mobile customers during the quarter. However, its prepaid base fell by 326,000.

Openreach also turned in a solid performance, seeing record fibre broadband net connections of 498,000 during the quarter, with service providers other than BT accounting for 48% of that total. Revenue inched down 1% to £1.28 billion on regulatory price reductions.

Group revenue came in at £6.13 billion, up 32% on last year due to the contribution from EE. Excluding EE, revenue was down 1.5%.

There is no getting too far away from the Italian scandal though, which was blamed for dragging down BT's pre-tax profit by 37% year-on-year to £526 million.

And with Italian prosecutor Fabio De Pasquale reportedly opening a criminal investigation into BT Italy, we shall doubtless hear a lot more about it in the weeks and months to come.

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