Before we actually go on to analyse these results it is important to mention at this point that on the announcement date T0 (10/05/2001), BT also made another announcement regarding a rights issue. The reason behind the rights issue was to provide greater financial stability and to help cut debt. The expectation was to cut debt by 5.9 billion. The record offer made in the Rights Issue was 3 for 10; that is, an offer of 3 new BT shares for every 10 BT shares held at the close of business on 9th May 2001.
The Issue Price represented a 47 percent discount to the closing middle market price of 568.5 pence per BT share, which was 300 pence.BT shares tumbled 7% in morning trading as investors digested the news but had recovered to 544p – to be 4.3% down on the day – by 1335 GMT. It is reasonable to say that the market took the huge rights issue as an indication that something was really wrong in BT’s position and this would explain the powerful negative reaction. It could be speculated that the management deliberately timed the announcement of the demerger to mitigate the powerful negative impact of the rights issue. The joint announcement of the demerger could be interpreted as a signal to the market that BT’s management was taking major steps by undertaking restructurings to tackle the problems effectively. However, the dramatic drop in BT share price suggests that the market remained sceptical of BT’s future and strategy.
Post Spin-off performance: After the spin-off and the other restructurings, BT saw a substantial improvement in their financial performance, with across-the-board improvements in key indicators such as return on capital employed, asset turnover, interest coverage and dividend coverage. In the year ended March 2003, their return on equity ballooned to a whopping 101%, compared to its nadir of -12.65% in 2001. By the financial year end 2002, it had also managed to it reduce its net debt to ï¿½13.
701bn from ï¿½27.942bn in the previous year, even though they were able to transfer only 500m of their debts to mm02, as opposed to the previously planned ï¿½2bn.In 2002, it also restarted its dividend payments, paying out 2 pence per share. The dividend payout has been increasing thereafter, amounting to 6.5 pence for the financial year 2002/03. BT has also announced that it expects to increase its dividend payout for the following years.
For 2003/04 it expects to payout 50% of it earnings as dividends, and anticipates that by 2005/06 it will increase the payout to 60%.BT Group vs. Telecommunications Sector (event study period) : As we have shown previously through our event study, the restructuring announcements were met by scepticism which led to a negative price reaction.
Although the price performance for BT was better than that of the telecommunications sector and some of its competitors in the fixed line business, in the long run BT has tended to under-perform against the whole telecommunication sector. This may be because of the stronger performance and relative dominance of the mno wayobile phone business in the telecoms sector, since compared to some of its competitors, BTs performance in the long run remains strong. Significantly though, BT continues to under perform against the FTSE 100 from the announcement day to date.Looking at BT, we propose that BTs poor performance against the FTSE 100 may be explained by the following: BTs high dividend payout policy for the immediate future signifies that although it is making profits and generates sufficient cash, the fact that the cash is being distributed to the shareholders reflects low growth opportunities; and Due to the increasingly competitive nature of the business and increasing deregulation of the telecom sector by Ofcom as it continues to dismantle BT’s monopoly, as shown in our industry analysis.
BTs profitability is under considerable threat because of the potential for loss of market share and wholesale fixed line revenues.The above would also explain why BT shares are currently traded at a P/E multiple of 10.9, below the industry average of 23.30 Conclusion: The spin-off was a good idea – as observed in our report earlier by BTs moderate financial recovery – after the restructuring BT decided that rather than diversify its businesses, it would reinforce the fixed line segment. That is why implementing a broadband network is a key element of its strategy. This makes more strategic sense since broadband, or fibre-optic networks, support both voice and data content, which therefore makes telephony and internet access natural by-products of each other without incurring high incremental capital expenditure. BT believes that this will create operational synergies that will add value for the shareholders.Spinning-off the wireless segment has not spelt the end of troubles for BT.
There are still quite a lot of potential pitfalls ahead, not least of which are rumours in telecom circles that the media to telecoms regulatory authority Ofcom might split up BTs wholesale operations from its retail operations. Still more, the directive from Ofcom on local loop unbundling, i.e.
, to cut tariffs on exchanges for wholesale customers, threatens to result in further declines in BTs revenues.Moreover, industry deregulation and substitutes such as Wi-fi, which allows users wireless internet access, and Voice over Internet Protocol (VoIP), which lets users make telephone calls through the internet, thereby by-passing the traditional exchange system (which some experts believe to be the “next big thing” in IT) are a threat to both BTs internet and telephony business. However, because of the spin-off, a leaner and more focused BT may be in a better position to face the challenges ahead.
References:Bland C (2002) ‘BT divests UK property portfolio for 2.3 billion’, 13 June 2002. [WWW]. www.btplc.
com. (19 February 2004)London Evening Standard (2002) ‘BT workers go on transfer’. 4 February 2002. [WWW].
com. (23 February 2002)Mathieson C (2001) ‘BT vows to end revamps as investors back mmO2 split’, The Times. 24 October 2001. [WWW] www.timesonline.co.uk (18 March 2004)