Commentary: How British Telecom Blew It

`It's good to talk" has been British Telecom's tag line for years. But lately it's clear that talking is a policy from which management considers itself exempt. BT's debt is approaching $45 billion. Its share price has fallen by two-thirds, to around $7, from its peak in January, 2000. No wonder shareholders are telling management to get a game plan quickly or get out. But as calls for the head of Chairman Iain Vallance or CEO Peter Bonfield grow louder, management continues to cling to its titles, and if they have a strategy, they've managed to keep it a secret from BT's 1.8 million shareholders. More and more, it seems the only way BT's leaders are likely to leave is on a stretcher.

This year, as Europe's telecom giants jockey for position in a turbulent market, they should keep in mind the example of BT: It is easy for a business to lose its way in this fast-changing industry. And the consequences can be huge for managers, employees, and shareholders alike.

The saga of BT is full of lost chances. Four years ago, it tried and failed to merge with MCI. A year later, it hooked up with AT&T to form Concert, a global-business telecom partnership that's now floundering as both companies focus on their own beleaguered businesses. BT and AT&T are now discussing whether to formalize Concert and make it a fully merged company or dismantle it.

While BT was busy trying to do a deal in the U.S., it missed what was happening on its own doorstep in Europe. Now, BT trails behind nimbler, more aggressive rivals such as cellular behemoth Vodafone Group. "To be beaten by another British company must be galling," says John Tysoe, head of global telecom research at WestLB Panmure in London.

Hoping to compensate for earlier missteps, BT embarked on an 18-month buying binge in mid-1999. Like its European rivals, BT overpaid for European licenses to operate next-generation wireless services and for investments in international-wireless companies. But BT, unlike Vodafone, spent billions buying minority stakes, often in second-tier players.

OUT OF OPTIONS. Now, the plunge in global telecom valuations is making it hard for BT to dig out from under its mountain of debt, which is roughly the same size as its market value. Standard & Poor's is expected to cut the telco's credit rating to a low single A next month. If the company is unable to pay off at least $15 billion of its debt by this time next year, its credit rating will fall to the lowest investment grade level, BBB. That will raise the cost of BT's interest payments by as much as $300 million annually. Moreover, it has negative implications for the amount of debt BT will be able to refinance and the price they will pay to do it.

With no other viable options to reduce debt quickly, BT, insiders say, is planning to call on its owners to approve a $15 billion rights issue. Shareholders would be able to buy newly issued stock at up to a 20% discount. But considering that none of the telco's nine non-executive board members have bought BT shares in the past year themselves, shareholders may need more enticement.

To be fair, BT did embark on a massive restructuring last April, reorganizing the business according to its main products: broadband, mobile, fixed-line, and data, all within Europe and Japan. But investor sentiment toward telecoms soured, and plans for spinning the units off fell flat. Now management is pondering solutions in advance of the May 17 financial results meeting. Analysts say BT may try to sell stakes in wireless companies such as France's Cegetel and Spain's Airtel. It could get rid of its prized 20% position in Japan Telecom and its mobile arm, J-Phone. BT may also eliminate its yearend dividend, which would save $1.3 billion. "Every day, the market changes. BT and its management will make decisions when the time is right," says Tim Johns, BT's director of media relations.

But the longer Vallance and Bonfield take to craft a game plan, the more shareholders will suffer. If management doesn't convince the market soon that it has either a credible proposal to reduce its debt or a coherent long-term strategy, the pride of privatization may find itself the loser in the telecom wars.

By Kerry Capell

With Heidi Dawley in London

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