Italy delivers a serious, but not mortal blow to BT’s fortunes


BT’s ‘Italian Scandal’ has it all – high-profile sackings, a worse than expected writedown, a share price at a four-year low, a plethora of lawsuits and a criminal investigation.

Ten days after BT announced earnings at its Italian opco had been overstated by £532 million, just how serious a blow has been struck to the UK-based operator?

The most visible indicator of BT’s problems is its share price, which dropped 20 percent when the news broke and has remained at this level ever since.

Allan Nichols, Senior Equity Analyst at Morningstar Benelux thinks traders have been “overly pessimistic” and that it will take a while for the market to realise that “the world is not coming to an end”.

Currently the stock is valued at around the 305p per share mark, but Nichols says that the “fair value” of the company is between 370p and 400p per share, a similar range to the one it trended in before news of the scandal broke.

Nichols highlights the four percent rise in revenues at BT Consumer in the three months to December 2016, and the two percent increase in underlying sales at EE, as examples of where BT’s growth will come from in the future.

He also cites BT’s decision to charge broadband subscribers as a positive step, allowing it to make a return on its investment into sports.

But Nichols admits BT’s problems will continue in the short term; he says it is in for an “ugly” final quarter of its financial year.

Much could depend on the internal investigation that BT is started, which is looking into financial processes, systems and controls across the Group.

Nichols agrees with the operator’s own view that it is unlikely to find misconduct in other areas of the business.

Should BT therefore look to cut its losses and sell its Italian business?

BT rather sidestepped the question when asked by European Communications.

“The best thing for us to do is focus on resolving these issues in our Italian operations, and focus on improving its performance in combination with strong controls,” a spokesperson said.

“We have appointed a new CEO for BT Italy who will now work to reposition and restructure the business for the future.”

Nichols thinks that there are good reasons to stay in Italy: BT has strong relationships there that extend to other countries where it does make a good return which are worth holding onto.

He adds that there are no loss-making contracts there that urgently need to be jettisoned.

CCS Insight Analyst Kester Mann argues that the scandal gives BT the chance to look more widely at its Global Services arm, under which BT Italia falls.

Paring it back through, for example, a merger with Deutsche Telekom’s T-Systems, could help BT focus on “an increasingly competitive UK market and the complex integration of EE”, according to Mann.

The BT spokesperson said the company remains “committed” to Global Services.

As a result of the scandal, three major heads have rolled.

Most recently, Corrado Sciolla, BT's continental Europe chief, has gone.

BT Italia CEO Gianluca Cimini and COO Stefania Truzzoli were suspended last September, when news of the scandal first broke, and are understood to have been dismissed.

The BT spokesperson said: “A number of BT’s senior management team in Italy were suspended and have subsequently left the business.

“It is not appropriate to comment on specific details of the investigation or the specifics of individual personal circumstances.

“If any individuals are found to have acted inappropriately, they will be disciplined, and potentially have their employment terminated, depending on the gravity of their actions.”

Then there are the legal threats.

In the US, numerous shareholder lawsuits have been filed against BT, which is common practice when such a dramatic fall in a share price happens.

Italian prosecutors are also reported to have started a criminal investigation into what happened.

Amid all this, the seriousness of the scandal is bound to have implications for staff morale in the rest of the company.

BT said that it had communicated directly with its employees to say that the situation was “completely unacceptable and that [its] shareholders have every right to be angry.”

But it also reassured them that the situation is under control and that the “vast majority” of the company is performing well.

This latter point is arguably true, although Mann points to three other ongoing challenges that could change it: a “huge” pension deficit, the future structure of Openreach and escalating costs to win TV sports rights.

BT Chief Executive Gavin Patterson faces a huge task in guiding his company through this difficult period.

The blow struck by the Italian scandal is very serious, but the performance of the rest of business will ensure it is not a mortal one.

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