By Maggie Urry
Published: January 22 2009 08:11 | Last updated: January 22 2009 08:21
BT Group, the former British Telecommunications, warned on Thursday that profits from its Global Services division had tumbled and its efforts to get to grips with the problems would lead to a £340m write-off.
The charges could be even higher, it said, and another “substantial” write-off could result from talks over two large contracts. An operational review of the division, which provides telecom and IT services for multinational companies and government departments, could led to yet more “substantial” charges for reorganisation and rationalisation to cut the cost base.
Ian Livingston, BT chief executive, warned that as a result, group profits for the third quarter to December 31 would be lower, although BT’s other divisions would edge profits higher by 5 per cent.
BT shares plunged 15 per cent in early London trading to 104.2p, making them the biggest fallers on the FTSE 100 index of blue-chip stocks. The company was privatised in November 1984 at 130p a share.
Since the write-offs in Global Services were non-cash items, BT said they would not affect the decision on the final dividend, which will be made at the year-end. Analysts have been fearful of a cut in the payment, which has been a prop to the shares.
BT first warned in November that profits at Global Services were falling sharply and instituted the review. Previously the division had been seen as the engine of growth for the group, but while revenues rose quickly, a plan to lift profit margins stalled.
In the second quarter the division achieved earnings before interest, tax, depreciation and amortisation (ebitda) of £119m. But BT said that would fall to around £17m, before the charges, in its third quarter to December 31. That compares with £215m in the same quarter of the previous year.
Morten Singleton, an analyst at Oriel Securities, said: “Far from the second-quarter clear-out at Global Services being the kitchen-sinked affair we had believed, BT has today come come out with a further profit warning and one-off charges galore.”
He said the writedowns would “merely add to the market concerns over the cash requirements of the pension deficit and the size of the likely decline in the dividend.”
After the problems were discovered last autumn, BT replaced the head of the division with Hanif Lalani, who had been the group’s finance director. Mr Livingston said Mr Lalani’s first job, alongside Tony Chanmugam, the new finance director, was to review the financial position of the division and its major contracts.
The division has always been proud of its work for leading organisations, which include the UK’s National Health Service and the Department for Work and Pensions, and companies including Thomson Reuters, Procter & Gamble, Fiat, and Nestlé.
However, it has now reviewed the assumptions used when it valued the contracts and as a result reduced their worth.
“Ongoing commercial discussions in respect of two of our largest contracts are likely to be completed during the fourth quarter. These may result in further substantial one-off non-cash charges in the current year,” it said.
BT declined to name the contracts and said the size of the write-offs would depend on the outcome of the discussions.
The group is known to have had severe problems in delivering a £2.5bn contract which is part of a £12.7bn programme to shift NHS patient records to an electronic database. The contract is years behind schedule and BT gets paid only when systems are shown to be working.
The problems at Global Services are aside from a plan announced in November to cut 10,000 jobs aimed at reducing BT’s cost base by £1.25bn.
BT said the group’s net cash outflow in the third quarter would be £32m, a £189m improvement, and net debt would be around £11.1bn.
Copyright The Financial Times Limited 2009
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