BT to Pay $429 Million for Late Network Installs for Rivals

Updated on
  • Regulator Ofcom delivers record penalty to former monopoly
  • Fine is another setback for chief executive Gavin Patterson

BT Group Plc was fined a record 42 million pounds ($53 million) and ordered to reimburse another 300 million pounds to competitors after an investigation found the former phone monopoly failed to adequately compensate them for broadband service delays.

The U.K. communications regulator Ofcom found a “serious breach” of rules in place to protect competitors who rely on BT’s Openreach network, according to a statement late Sunday. The resulting penalty, dwarfing the 4.6 million pounds of fines levied against Vodafone Group Plc last year, puts another blot on the record of Chief Executive Officer Gavin Patterson.

Patterson has struggled to contend with tightening regulation from Ofcom at the same time as BT faces challenges in its government and corporate outsourcing business and an accounting scandal in Italy. The rebuke over how it treats customer-competitors like Vodafone and TalkTalk Telecom Group Plc sheds light on a yearlong dispute with Ofcom that resulted in an agreement this month to legally separate Openreach. Ofcom said the delays in payments hurt British customers and the introduction of speedier broadband services.

“Our message is clear -- we will not tolerate this sort of behavior,” Ofcom’s investigations director, Gaucho Rasmussen, said in the statement.

Shares of BT fell as much as 2.1 percent and were down 1.3 percent at 321.45 pence as of 12:10 p.m. in London. The stock has lost 26 percent in the past 12 months.

Dividend Coverage

The fine raises questions about the sustainability of BT’s dividend-growth plan and may affect the rules for how Openreach will provide service to BT’s rivals going forward, Dhananjay Mirchandani, an analyst at Bernstein, said in a note to clients.

“It feels like death by a thousand paper cuts,” Mirchandani said. “Although the company has reiterated its dividend guidance, we struggle to see how it will be able to do so without dipping into capital.”

The debate over Openreach, BT’s biggest income-generating unit, has weighed on the company’s stock since Ofcom started consulting on the future of the network in February 2016. Its separation is seen by the regulator and U.K. government as a way to spur investment in fiber lines to boost internet speeds, rather than the mix of fiber and copper BT has prioritized. The government has made development of the U.K.’s digital infrastructure a priority as it prepares to leave the European Union.

Investors are now awaiting the results of another Ofcom review in the coming weeks that could negatively affect Openreach cash flows. The most anticipated decision is whether the regulator intends to start imposing limits on the prices Openreach charges customers such as Vodafone and Sky Plc for its standard broadband product, which includes fiber to the street cabinet and then copper to the premises.

In addition to the Openreach uncertainty, BT has been in the dog house with shareholders over an accounting scandal in its Italian business and for a slowdown in its U.K. and international outsourcing businesses, which all contributed to a reduction in its earnings forecast in January.

Reduced Payments

CEO Patterson and Clive Selley, the head of Openreach, apologized in a statement. The company is treating the fine and compensation payments as a specific-item charge and said its business outlook for the next two years won’t be affected.

“We take this issue very seriously and we have put in place measures, controls and people to prevent it happening again,” Patterson said in the statement.

BT received the fine for reducing payments to companies that rely on its network when it didn’t deliver business ethernet services on time. Ofcom opened a probe into the issue in November 2015 after complaints from Vodafone, and found that BT had misused the terms of its contracts from January 2013 to December 2014.

BT is allowed to assume customer permission to extend its timeline to deliver services in some cases, but Ofcom found BT did this retroactively over a sustained period to reduce the amount of compensation it had to pay for delays.

“We hope this ruling will encourage BT Openreach to finally drop the unacceptable practices it has used to avoid paying compensation for late delivery of fixed fiber lines,” Vodafone said in a emailed statement. “We look forward to improved quality of service from Openreach in order to deliver high speed broadband to businesses up and down the country.”

BT estimated the compensation it will have to pay at 300 million pounds, though the amount may change. The carrier will also pay a 300,000-pound penalty for failing to provide information to Ofcom.

(Updates with comment from BT CEO in 12th paragraph.)
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