If you are a long-term British Telecom shareholder you can be forgiven for feeling bewildered. Barel...
If you are a long-term British Telecom shareholder you can be forgiven for feeling bewildered. Barely five years ago, the company was the UK's flagship. It was negotiating to buy MCI in the US, picking up stakes in various European companies to build up a seamless pan-global phone network, and paying its shareholders decent dividends.
Now we learn that just for the company to maintain an A grade credit rating it may have to ask shareholders for about £5bn through a rescue rights issue.
How can this be, you might ask? It was only four years ago that the company felt it was sufficiently cash-rich to pay out a special dividend worth 35p per share to all of its shareholders. That cost it £2.9bn. Now it wants the money back again and shareholders may soon find what was special about the dividend receiving money that has been taxed at either 23% or 40% and then being asked to return it gross four years later. But the fact is that BT will soon have debts of £30bn being supported by shareholder equity of just £15bn. Gearing, to use the technical expression, will be about 200%.
That is way out of kilter, even for a formerly cash-generating powerhouse such as BT, and if it does not get a bailout from its shareholders it faces the prospect of having its debt reduced to junk bond status. In practical terms, apart from the stigma, it will mean having to pay out up to another £200m a year in extra interest. It will also mean that the company disappears from many blue-chip equity funds that do not allow investment in sub-investment grade companies.
Chief executive Sir Peter Bonfield knows his neck on is on the line. but apparently for once will not be panicked into making any rash measures. He admits that in spending £4.5bn on a third-generation mobile phone licence in the UK and more in Germany, BT overdid it.
BT is committed to reducing its debt by £10bn by the end of the year through planned disposals and spin-offs but says it will not sell its assets dirt-cheap to support a credit rating.
Alas, the poor response to the flotation of mobile phone group Orange by France Telecom has put its plans under pressure. A flotation of BT Wireless, which includes UK mobile phone group Cellnet, now looks unlikely given the depressed share prices in the sector.
Yellow pages division Yell could be spun off, but investors are unlikely to swallow that with a heap of debt coming with it.
So it increasingly looks likely that, indeed, it will be shareholders who will have to play the role of the cavalry. Institutions will likely demand the resignation of chairman Sir Iain Vallance, regarded by many as one of the causes of BT's problems, in return for stumping up more cash. Bonfield could go as well, though that looks more in the balance.
Private investors will face a more straightforward choice of whether to put in more cash or not, depending on the price. Our view is that despite the about-turn in its fortunes from the mid-1990s, BT will still be worth supporting.
Taking on a mountain of debt to fund an unproven technology does not look smart with hindsight, but it's not a lost cause yet. For all its problems, BT remains central to the UK's telephone network a fact that will become more apparent when new, high-speed ADSL lines come into their own.
If the present management cannot turn that to their own advantage, when sentiment picks up about the telecoms sector again BT will be high on someone's shopping list.