Britain's biggest telecoms provider, BT Group Plc, has been having a terrible time of it lately. Its shares are the fourth-worst performer on the FTSE 100 so far this year, and the worst among European industry peers. On Friday, it reported financial first-quarter results that reveal how hard it will be to change investors' minds about its prospects.
While the consumer business, which sells mobile and broadband services to increasingly cost-conscious Brits, is actually doing alright, BT's divisions that serve U.K. public sector customers and multinational corporations abroad are under-performing. Chief Executive Officer Gavin Patterson neglected these duller parts of the company last year as he focused on integrating BT's 12.5 billion-pound ($16.4 billion) acquisition of mobile player EE and fighting a drawn-out battle with regulators over Openreach.
And an accounting scandal in Italy, revealed in January, has cast a long shadow. BT on Friday took a charge of 225 million pounds related to the mess, on top of a 530 million-pound one taken earlier. According to the Financial Times, the payment was needed to placate Orange SA and Deutsche Telekom AG, who became sizeable shareholders in BT after the EE sale only to see the values of their stakes shrivel.
Unfortunately BT's other problems could require it to write more checks that would drag down profitability. It faces a review of its pension fund by an independent board in the coming months, and may have to make a big top-up payment to keep trustees happy.
BT is also in continued negotiations with regulators over the terms at which its Openreach division, which runs the national broadband network, rents out capacity to competitors. If Ofcom imposes lower line rental rates or leans on BT for more and faster fiber investments, that would dent cash flows. Openreach accounted for about one-third of the group's 7.6 billion pounds of Ebitda in the last financial year and a similar proportion of operating free cash flow of 4 billion pounds.
Share of BT Ebitda from Openreach About 1/3
Reflecting this uncertainty, BT shares merit a lower multiple than peers. They are now trading at 5.4 times enterprise value-to-forward Ebitda, according to Bloomberg data, compared to 7.1 times for the European sector.
To try to win back confidence, Patterson unveiled a reorganization on Friday to bring BT's broadband and mobile businesses together and put them under a single manager. The change, aimed at a trimming costs and doing more cross-selling, is overdue given that the EE deal was completed a year and a half ago.
He also repeated pledges for a "progressive dividend" to convince investors to stick around. The company's 12-month forward dividend yield stands at 5.4 percent compares with a sector average of 4.95 percent. For now, this is pretty much all BT has to offer.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.
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