GENEVA-How the mighty have fallen. British Telecommunications (BT), once ranked among the world’s most powerful carriers, is finding itself buckling under a crippling mountain of debt in a climate where raising equity in the telecom/information technology (IT) sector has hit an all-time low. In the face of a multitude of rescue plans, senior management’s seeming reluctance to make the tough decisions needed to restore investor confidence finally prompted the unseating of long-time Chairman Iain Vallance, amid increasingly strident calls for big changes at one of Europe’s best-known operators, including the spinoff of its wireless business.
The once-robust British incumbent, long accustomed to leading the way in its home market, where it boasts 28 million fixed exchange lines and almost 11 million mobile customers, is struggling to find its way out of a maze of problems that have taken most investors and industry analysts unawares.
With plans to offset mounting debts of US$43 billion undermined by the current sharp downturn in telecom stocks, BT was placed on credit watch by Standard & Poor’s in February and now faces a possible two-notch downgrade on its long-term debt-currently rated at A2-by Moody’s Investors Service. Both firms said they are concerned about the degree to which BT’s debt-reduction program is linked to mobile assets, following the poor showing of wireless rival Orange’s February initial public offering (IPO), which raised less than 50 percent of the forecast sum.
For BT, a debt downgrading would deliver a serious blow to corporate pride in an organization accustomed to regarding itself as a European trailblazer. Privatized in 1984, it was the first European carrier to face liberalization, when the U.K. local market opened to full competition in 1991. Its success in weathering that transition put it in a decisive position when Europe’s 14 other major markets liberalized on 1 January, 1998, helping it confidently broaden its portfolio of holdings across Europe and into prime Asian markets like Singapore, Korea and Japan. The global vision of Chief Executive Officer (CEO) Peter Bonfield also propelled the company toward a potentially brilliant marriage with MCI that would have seen the two companies emerge as the first true global supercarrier.
Today, that empire is in tatters. Pipped to the post by WorldCom’s Bernie Ebbers, who stole MCI out from under its nose in 1997, BT has also watched a number of other seemingly solid investment decisions slowly turn sour. With around US$9 billion of debt in bonds that carry “step-up” clauses that could raise interest payments should its credit rating drop below “A,” BT is looking increasingly desperate in its efforts to find ways of shoring up fast-eroding credibility with investors.
But while BT spokesman Roger Westbury confirmed the company’s announced intention of refocusing tightly on Western Europe, where it holds 100-percent stakes in three wireless operators-Germany’s Viag Interkom, Ireland’s Esat Digifone and Telfort in the Netherlands-and Japan with a 20-percent stake in Japan Telecom and 20 percent of that company’s wireless arm, J-Phone, BT’s dire financial predicament led to its recent announcement to ditch its key Japanese assets in a sale to Vodafone Group. In addition, it sold its 33-percent stake in Malaysia’s Maxis Communications to Usaha Tegas. Additional holdings in other viable Asian operators, including 18 percent of Singapore’s StarHub, 20 percent of Hong Kong’s SmarTone and 24 percent of LG Telecom in South Korea, could be relinquished in the near future.
Mounting pressure to improve its precarious financial position has also prompted the company to sell stakes in European operators in which it does not hold controlling interests, including its 34 percent of Switzerland’s Sunrise-sold to TeleDanmark last November-and its recent sale of 17.8 percent of Spain’s Airtel to Vodafone. BT’s 20 percent of Italy’s fourth mobile operator, Blu, is also said to be on the auction block.
To date, however, this new focus, along with last year’s restructuring of operations into four core business units, BT Ignite, Btopenworld, BT Wireless and Yell, has left ratings agencies, shareholders and analysts cold.
“Just three years ago, BT was undoubtedly one of the world’s hottest telecoms stocks,” said Camille Mendler, director, fixed telecom services with The Yankee Group Europe, based in London. “Now rival carriers like France Telecom have stolen a surprising march, building a strong portfolio in the fastest-growing, most lucrative segments through the acquisition of Orange, a strong player in many European markets, and Equant, an undisputed leader in global business services.”
BT’s best-laid plans to float 25 percent of BT Wireless, which includes U.K. cellular arm BT Cellnet, to help cover the cost of its o4 billion (US$5.7 billion) U.K. third-generation (3G) license and 3G licenses in Germany, the Netherlands and Spain, has also gone seriously awry, following the poor showing by Orange earlier this year. Furthermore, with less than 200,000 subscribers now separating BT Cellnet and Orange, BT’s mobile operation looks almost certain to have to concede its long-held second place in the U.K. market to its France Telecom-owned rival in the next few weeks.
In just sixth place Europewide, with 6 percent of subscribers compared to market leader Vodafone’s 20 percent, BT Cellnet’s declining hold on the U.K. market has prompted suggestions of a possible merger with another European operator, such as Spain’s Telef
