BT div­i­dend un­der threat as pen­sions face top-up

The Sunday Telegraph - Money & Business - - Front page - By Christo­pher Wil­liams

BT faces a fight to save its div­i­dend as it pre­pares to re­veal a £13bn fund­ing black hole in its pen­sion scheme.

The com­pany will re­veal the im­pact of its tri­en­nial pen­sion re­view along­side an­nual re­sults on Thurs­day, a move that is ex­pected to trig­ger a sharp in­crease in top-up pay­ments to as much as £1.1bn an­nu­ally.

Chief ex­ec­u­tive Gavin Pat­ter­son will aim to soften the blow to BT’S cash flow with a strat­egy up­date to slash op­er­at­ing costs, in­clud­ing by cut­ting thou­sands of jobs and slim­ming down the strug­gling Global Ser­vices out­sourc­ing di­vi­sion. The restruc­tur­ing is ex­pected to save £500m over three years.

BT has also been work­ing on a deal to pledge as­sets to the pen­sion scheme as se­cu­rity, to pro­vide trus­tees com­fort that re­tire­ments will be funded if the com­pany hits trou­ble and so make the top-up pay­ment sched­ule less oner­ous.

It had ex­plored sign­ing over rights to its net­work but it is un­der­stood al­ter­na­tive as­sets are now on the ta­ble. The change of plans could one day make a sale of its net­work sub­sidiary Open­reach more sim­ple.

De­spite BT’S ef­forts, its pol­icy of hold­ing or in­creas­ing the div­i­dend to around a mil­lion share­hold­ers a year is viewed as be­ing un­der threat.

It is un­der pres­sure from politi­cians and reg­u­la­tors to in­crease in­vest­ment in “full fi­bre” broad­band up­grades but has re­sisted, in part due to op­po­si­tion from its big­gest share­holder Deutsche Telekom, which faces sim­i­lar lob­by­ing in Ger­many.

BT’S strat­egy up­date could sig­nal more spend­ing over time, how­ever, fol­low­ing a re­cent warn­ing from Of­com chief ex­ec­u­tive Sharon White that fail­ure to in­vest in new tech­nol­ogy could mean it is over­taken by new ri­vals. Bar­clays cut its tar­get price on the shares last week, cit­ing emerg­ing com­pe­ti­tion from new full fi­bre whole­salers.

An­a­lysts have strug­gled to pre­dict whether a div­i­dend cut is likely. Citi has given even odds, while Ex­ane has fore­cast a 30pc cut. BT de­clined to com­ment on the is­sue.

There has there been a dis­tur­bance in the force. Bil­lion­aire space pi­o­neer, time-trav­eller and im­mor­tal su­per-be­ing Elon Musk con­sid­ers him­self one of the world’s great mav­er­icks but last week his im­pa­tience with us mere mor­tals reached new heights. Quar­terly earn­ings calls are a long-stand­ing and im­por­tant fea­ture of the pub­lic mar­kets. A com­pany re­ports its lat­est fi­nan­cial fig­ures, then ex­ec­u­tives face ques­tions from an­a­lysts about the re­sults. Yet Musk, it seems, has lit­tle time for such con­ven­tion, ar­ro­gantly re­fus­ing to re­spond when quizzed about the fi­nan­cial health of his strug­gling elec­tric car­maker Tesla.

At one point Musk in­ter­rupted, say­ing: “Next. Bor­ing bone­head ques­tions are not cool.” He then chose to field 20 min­utes of ques­tions from a 25-year-old Youtube star.

Per­haps Musk was just tired and grumpy. It can’t be easy try­ing to si­mul­ta­ne­ously con­quer space, con­sign the com­bus­tion en­gine to his­tory and rev­o­lu­tionise the speed of terrestrial travel.

Yet Musk’s tetch­i­ness hints at a much big­ger prob­lem: that Tesla has some real is­sues. When the boss of a large pub­lic com­pany, par­tic­u­larly one that is burn­ing through cash at the fright­en­ing rate that Tesla is, ob­jects to a hand­ful of rou­tine ques­tions, alarm bells ring loudly. No won­der his petu­lant dis­play wiped more than $4bn off Tesla’s share price.

Musk should be care­ful that he doesn’t at­tract com­par­isons with some of the big cor­po­rate dis­as­ters of mod­ern times, which were pre­saged by bosses who dis­missed those that dared to probe.

For­mer UK tech dar­ling Au­ton­omy banned an­a­lysts from at­tend­ing ex­ec­u­tive pre­sen­ta­tions be­fore it even­tu­ally im­ploded. And En­ron boss Jef­frey Skilling was caught call­ing one dogged in­quisi­tor an “a------”.

Musk is un­ques­tion­ably a gen­uine vi­sion­ary but his dis­mis­sive at­ti­tude is what makes him a hero to sup­port­ers. He re­cently ad­vised Tesla em­ploy­ees to walk out of un­pro­duc­tive meet­ings. Like Don­ald Trump, his sup­port­ers lap up the in­so­lence – the more Musk at­tacks his de­trac­tors, the more the fan­boys cheer him on.

Still, in this in­stance he is wrong to lash out. Con­cepts like profit, cap­i­tal ex­pen­di­ture and cash flow may seem ir­rel­e­vant to an en­tre­pre­neur­ial wiz­ard on a mis­sion to up­end the en­tire car in­dus­try, but they have proven to be pretty reli­able tools when it comes to as­sess­ing a com­pany’s long-term prospects. His ret­i­cence to an­swer some fairly ba­sic ques­tions sug­gest the great Tesla ex­per­i­ment is un­der threat.

‘The more Musk at­tacks his de­trac­tors, the more the fan­boys cheer him on’

New BT strat­egy a test for Pat­ter­son

BT boss Gavin Pat­ter­son ar­guably faces the most piv­otal mo­ment of his five-year ten­ure this week when it un­veils a new cor­po­rate strat­egy.

The com­pany is still reel­ing from an ac­count­ing scan­dal in Italy, which slammed the brakes on at­tempts to turn a bloated for­mer na­tional in­cum­bent into a con­sumer-fo­cused TV and mo­bile busi­ness. The share price has halved since. Pat­ter­son must now prove ca­pa­ble of tak­ing the tough de­ci­sions re­quired to drag BT into the 21st cen­tury.

End­ing the com­pany’s gold-plated pen­sion scheme has proven deeply un­pop­u­lar but the move is ab­so­lutely cen­tral to progress. Re­tire­ment ben­e­fits at BT are among the most gen­er­ous in ex­is­tence and are one of the rea­sons why staff turnover is no­to­ri­ously low and the age of BT em­ploy­ees way above the na­tional av­er­age.

The next step will be equally con­tro­ver­sial. The com­pany is also ex­pected to an­nounce thou­sands of job cuts, along­side full-year re­sults, an­other move that will draw crit­i­cism. It will be the largest round of re­dun­dan­cies for al­most a decade.

There is a strong ar­gu­ment that run­ning BT is one of the tough­est jobs in cor­po­rate Bri­tain. As a state mo­nop­oly, it is sub­ject to huge po­lit­i­cal and reg­u­la­tory pres­sure. It must tackle pow­er­ful unions, and jug­gle an eye-wa­ter­ing pen­sion deficit, while be­ing one of the FTSE’S big­gest div­i­dend pay­ers.

Yet the com­pany finds it­self thrust into the cen­tre of the UK’S dig­i­tal econ­omy. Only weeks ago, Of­com chief Sharon White warned that if BT doesn’t change course and in­vest in the fu­ture, it risks los­ing swathes of cus­tomers to more nim­ble ri­vals and be­com­ing the next Kodak, Po­laroid or Block­buster.

De­spite some tough set­backs, Pat­ter­son must be al­lowed the time to en­act his turn­around.

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