BT cuts Net access rates, shares leap on solid Q3

Braden Reddall

LONDON: A slimmer BT Group reported third-quarter earnings ahead of forecasts on Thursday and threw its weight behind cutting fast Internet access costs to lure reluctant UK consumers and help the company rediscover growth.

Shares in Britain's dominant fixed-line phone company, hit by sector troubles in recent weeks, rose five per cent to close at 238-1/2 pence. BT has now outperformed the Stoxx pan-European telecoms index by 15 per cent so far this year.

Pre-tax profit before exceptional items and goodwill amortization came in ahead of forecasts at 381 million pounds ($539 million) in the three months to the end of December.

John Hatherly at fund manager M&G, a top-five BT shareholder, said the results were "satisfactory" and investors were warming to BT's new management and its potential to shine in a sector tarnished by bankruptcies and profit warnings.

"No one's throwing their hat in the air," he said. "But it's pretty good in a sector where bad news is not hard to find."

BT has changed drastically in the past year. To cut its huge debt pile, it sold assets, set a record with a huge share issue and scrapped Concert, its US joint venture with AT&T.

It also demerged its mobile arm to create mmO2, prompting concerns it had lost its potential for high growth.

New chief executive Ben Verwaayen said it was too early for him to make specific statements about where BT was headed now but promised to spell out a strategic plan in two months.

He identified high-speed Internet access as a key part of the plan, and said broadband prices would fall "substantially". Details on the new prices would be announced in two weeks.

Critics say BT's 30 pound ($42) wholesale broadband monthly charge to Internet service providers (ISPs) is too high for them to attract many users. Britain is last among the Group of Seven industrialized nations in the use of fast Internet lines.

What is "substantially"?

BT had 127,000 broadband subscribers at the end of December. A price cut would help BT's ISP Openworld, charging 40 pounds a month, get closer to cable companies NTL and Telewest, who charge a retail price of 25 pounds a month and have signed up about a quarter of a million broadband users.

Andrew Heaney, analyst at Spectrum Strategy Consultants, estimated about five pounds would come off BT's broadband price, which would particularly benefit Openworld, along with BT's competitor-clients such as Freeserve and AOL. "It's good for BT, and it's good for UK Plc," he said.

While lower prices hit short-term margins, the increased scale would make BT's investment more cost effective and would help it grab a piece of the growth analysts expect will come from broadband services such as games, movies and music.

On the debt market, the spread on BT's 6.125 per cent euro bond due February 2006 narrowed by three points to 137 basis points over government bonds, while the rest of the sector widened.

"It has transformed itself into a low risk utility style business with a clean balance sheet and, importantly, no reliance on asset sales or equity markets to reduce its debt burden," Bear Stearns telecoms credit analyst Philip Crate said.

Third quarter exceptional items include 900 million pounds from property sales, a 165 million loss from investment sales, a 58 million charge for shutting Concert and a 58 million goodwill impairment charge on its stake in Italian mobile firm Blu.

Net debt fell 2.9 billion pounds to 13.6 billion, though BT said it would rise to "under 15 billion" in the fourth quarter. Outgoing Finance Director Philip Hampton also expected full-year capital expenditure to come in under 3.25 billion pounds.

As for the controversial subject of BT's entering the broadcasting market, Verwaayen said media would be just one of the uses for the company's broadband network.

A former chairman of "Big Brother" creator Endemol, Verwaayen said he had a lot of respect for the unique nature of managing creative talent-driven businesses, implying BT was unlikely to get deeply involved in production.

(C) Reuters Limited.