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BT to overhaul business
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May 10, 2001: 6:55 a.m. ET
UK phone company to sell shares, demerge wireless unit to beat debt
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LONDON (CNN) - British Telecom took a decisive step on Thursday to slash its debt mountain, overhaul its business and stave off investor criticism.
Britain's No. 2 phone company, under intense pressure to slash its debt mountain of £28 billion, said on Thursday it will raise £5.9 billion ($8.4billion) through a rights issue. It also plans to spin off its wireless unit.
Only last week, BT sold its Japan Telecom, J-Phone and Spanish assets for £4.8 billion to rival Vodafone, as it moves to cut its debts by about £10 billion this year. The company's debt has already cost its chairman his job.
BT Finance Director Philip Hampton told CNN that "market conditions for an IPO (Initial Public Offering) are particularly difficult at the present. The rights issue is the way to go."
BT, the UK's dominant fixed-line operator, will offer existing shareholders three shares for every 10 held at 300 pence each, which represents a 47 percent discount to Wednesday's closing price of 568.5 pence.
BT's stock fell 7 percent to 528 pence in midday trade.
Hampton said the BT had decided along with its bankers – Merrill Lynch and Cazenove – on the huge discount to the current market prices because "no one had done this (large share issue) before" and to cut underwriting costs.
The rights issue will be almost three times the largest previously seen in the UK.
Under the restructuring two companies, BT Wireless, the fifth-largest mobile phone company in Europe, will be demerged and a new company BT Future will be formed to hold the remaining assets.
As for the fall in stock price. "The £15 pound peak (January 2000) was an unusual rise," Hampton said. "The telecom industry is poised for long-term growth. We have the strong brand going forward."
BT's stock price has fallen more than 60 percent since the beginning of last year, as the company built up debts, largely from buying third-generation, or high-speed, mobile phone network licenses.
The company paid £5.1 billion to acquire a permit in Germany and about £4.5 billion in the UK. The company also spent another $6 billion on increasing its stake in German mobile phone operator Viag Interkom to 90 percent.
The latest move to cut its debt could stave off threats of having its credit rating cut by two notches by rating agencies. That would mean BT's interest costs would rise by more than £100 million a year.
BT brought forward its year-end results, saying it made a loss of £2.9 billion, or 44.9 pence a share, in the fourth-quarter to March 31, from a profit of £437 million, or 6.8 pence a share, in the year earlier period.
The company said it took a £3 billion charge against the goodwill of its German outfit Viag "in light of changed expectations for the business."
The phone company said it would not pay a dividend.
BT also still plans to go ahead with the sale of business directory Yell and of its property portfolio.
BT's Hampton said that the company was in "active" talks with AT&T (T: Research, Estimates), the U.S. phone giant, about the future of its Concert business services. Media reports have speculated that BT may sell its stake in the business. 
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