BT CEO Says Company Was Deceived by a Few Employees in Italy

Updated on
  • Patterson says unit now under control; head of Europe to leave
  • ‘It was a very sophisticated manipulation of profitability’

BT Group Plc Chief Executive Officer Gavin Patterson sought to distance himself from an accounting scandal in Italy that’s rocked the U.K. phone company, pointing the blame squarely on a few rogue employees and removing the head of European operations under whose watch the activities occurred. 

“It was a very sophisticated manipulation of the profitability of the business,” Patterson said on a conference call Friday. “False invoices, off-balance sheet loans, these types of things, and it turned out to be bigger than we thought.”

Gavin Patterson

Photographer: Chris Ratcliffe/Bloomberg

The impact of the 530 million-pound ($666 million) provision coursed through BT’s balance sheet on Friday, as the former U.K. telecom monopoly reported a 53 percent drop in profit. Moody’s has warned it may cut BT’s credit rating, and analysts are skeptical of the company’s pledge to maintain a 10 percent growth in its dividend, in light of the problems in Italy and a deteriorating market for government contracts and international corporate business.

BT said on Friday that the company’s head of continental Europe, Corrado Sciolla, is leaving the business. “This has happened on his watch,” it said in a statement.

The third-quarter results cap a week of turbulence for BT and follow the biggest blow to Patterson’s reputation since he took the helm in 2013. Patterson has focused on transforming a company long dependent on bulky government contracts into a consumer-focused brand, with the acquisition of EE and investments in sports TV content. He also faces a ballooning pension deficit, regulatory battle and political pressure to invest more in fiber.

“The situation in Italy is very serious but we mustn’t lose sight of the fact that BT remains in good health overall,” Patterson said on a call with journalists. “We’re a profitable company with some very strong businesses and we’re generating strong cash flow.”

The scandal in Italy and weakness in its U.K. government and international businesses that led to a profit warning caused BT stock to sink 21 percent on Tuesday. BT said an investigation found “inappropriate behavior” and “improper accounting practices” going back several years in Italy and tripled the writedown from its original estimate in October.

Nick Rose, the chairman of the BT board’s audit committee, has flagged internal-control issues in Italy in every annual report since May 2013. On Friday, Patterson rejected any notion that the company was lax in taking almost four years to get to the bottom of the matter. He said he was angry at managers in Italy who effectively lied to their superiors and to auditors.

Auditors Misled

“It’s fair to say the audit committee have looked at Italy a number of times in the last few years, but the audit committee were misled in the same way that the management was misled,” Patterson said on the call. “It can be very challenging to find out unless you’ve got forensic accountants and that’s what we’ve done in the last quarter, we’ve really got underneath this issue, we’ve scaled it, we’ve sized it and now we’ve acted.”

Patterson said the problems in Italy were under control and limited to a small number of people, and BT is working with authorities. If the profitability issues can’t be fixed, the company will consider the sale of the unit, or even weigh options for the broader global services unit, whose performance was propped up by false profits from Italy.

The company suspended its two top executives at the unit in September, and they have since left the company. Bloomberg News reported Thursday that Andrea Giovanni Bono, the head of BT’s businesses in Switzerland, the Nordics, central and eastern Europe and Russia, will take over the Italy role on Feb. 1.

Profit Slump

It’s too early to say whether BT will start a replacement process for PricewaterhouseCoopers, its accountant for decades, any earlier than the 2019 requirement, Patterson said.

Third-quarter profit fell to 374 million pounds ($469 million), according to a statement. That included a 245 million-pound provision to lower the value of the Italian business. Underlying revenue fell 1.5 percent in the period that ended on Dec. 31. Overall, BT reported a 32 percent increase in revenue to 6.13 billion pounds, aided by the acquisition of EE a year ago.

Mobile Growth

The company said it added 276,000 new mobile customers paying monthly. The company also had record demand for fiber broadband at Openreach with 498,000 homes signing up for faster speeds, it said.

Among BT’s public-sector and major-business customers, revenue fell 15 percent. A number of large government contracts are ending, the company said, and some contracts are winding down more quickly than it expected, and “the current market is not providing the opportunity to replace these with profitable new business.”

The company said it believes it can come to an agreement with U.K. regulator Ofcom regarding the future of Openreach and continues to work on a voluntary settlement. Ofcom has argued for the legal separation of Openreach from BT, which the company has said would add pension costs. It reiterated expectations to grow its dividend by at least 10 percent in both 2016/2017 and 2017/2018.

BT shares fell 0.5 percent to 300.55 pence at 10:14 a.m. on Friday in London. The stock is down 18 percent this year.

“We would remain cautious,” on BT, Jefferies analysts led by Jerry Dellis wrote in a research note. The stock isn’t cheap given the amount that cash flow is still dependent on the public-sector business, multiple regulatory headwinds and the risk of losing rights to European Champions League soccer to Sky Plc in the current auction, Dellis said.

Dividend coverage is “a bit tight” and BT isn’t left with much capacity to spend more on fiber-to-the-premises to satisfy Ofcom without doing away with its dividend-growth promise, he said.