Not every BT shareholder, one suspects, will have been aware the company has a meaningful presence in Italy. But they all know now. A unit that last year contributed only 1% of group profits has blown a hole in this year’s numbers and shredded BT’s reputation for solidity. The BT chief executive, Gavin Patterson, may see bonuses clawed back from past years, an action that investors might regard as just. All the gains in the share price on Patterson’s three-year watch have evaporated with Tuesday’s 21% tumble. This profit warning will be remembered for years.
It is evident that BT has been taken completely by surprise by the Italian revelations. Back in October, “inappropriate management behaviour” in Italy was said to be leading to a “non-cash” write-down of £145m. That behaviour has now been upgraded to “improper” – which amounts to an allegation of fraud – and the bill will definitely be felt. The adjustments will be £530m, of which £500m will be in cash as working capital transactions are unwound.
BT says it has taken “immediate steps to strengthen the financial processes and controls in that business”, but that doesn’t explain why the controls were weak in the first place and why BT has a whistleblower to thank for a tipoff.
The annual reports of the past two years describe how “full-scope audit work” was conducted in Italy, including visits in each year by the auditors PricewaterhouseCoopers. What went wrong? Why were two different teams of forensic accountants needed to get the full story? It is not only BT’s remuneration committee that should be examining “the wider implications” – so should the audit committee.
The other half of the profit warning related to a slowdown in UK public sector work and orders from international companies. That is outside management’s control, but the effect is that BT, having managed to inject growth into its business, is once again talking about flat group revenues. In terms of cash, the news is probably worse: by BT’s estimates, over the course of this financial year and next, the group will generate £1bn less than previously thought.
Amid the storm, BT is sticking to its promise that the dividend will keep rising by at least 10%. At face value, that looks affordable, even on the revised forecasts. But it wouldn’t take much for the numbers to look horribly tight. Pension contributions are set to rise substantially next year and the pension trustees, overseeing a fund with a deficit of £6.2bn at the last count, won’t be impressed by the non-appearance of £1bn in the sponsor’s coffers. On the regulatory and political front, the pressure for Openreach to step up investment in ultrafast fibre broadband will only intensify.
Then there’s the attempt to challenge Sky’s dominance in football. Until now, investors have regarded the adventure as high risk but have trusted management’s judgment. They may not be so tolerant in future. BT hadn’t had a profit warning for almost a decade, but now, in one statement, it looks a different business. Patterson will find the BT Sport question gets tougher, as it should. If you want to spend squillions on football rights do not score spectacular own goals elsewhere.
Stelios holds back the throttle at EasyJet
Sir Stelios Haji-Ioannou is mellowing. For years, he could be relied upon to protest loudly if there was even a hint of poorly timed expansion at the airline he founded. In theory, now would be a fertile moment. EasyJet’s shares – battered by currencies, competition, fuel prices and disruption – have almost halved in value in 12 months and yet the group is expanding capacity by 9%.
Sir Stelios isn’t happy but will vote only a “token” 3% holding – about one-tenth of the family’s total – against the re-election of chairman John Barton. In the old days, he used to vote the whole lot against former chairman (and BT incumbent, by the way) Sir Mike Rake.
What’s changed? First, the relationship with Barton is clearly good. Second, the Haji-Ioannou clan will soon have enjoyed about £400m in dividends since easyJet started distributions in 2011. Third, the latest quarrel over new planes is really about what happens in 2018, which leaves time for debate. In the circumstances, Sir Stelios is right to refrain from a full tantrum. He never succeeded in ousting Rake, and dialogue with Barton seems a better tactic.
Cameron’s Brexit tourism boost
Exciting news for delegates heading to Bangkok for the World Travel & Tourism Council Global Summit in April: they will be addressed by David Cameron, who these days has time and appetite for such a gig.
The organisers want our former prime minister to drone on about “the key geopolitical issues currently facing the world”. Forget that. Cameron owes us a favour. Just tell them that, thanks to your referendum, prices are 20% cheaper for tourists to the UK.
