BT Plunges on Weak Outlook as Job Cuts Fail to Impress Investors

(Bloomberg) -- BT Group Plc pledged to cut 13,000 jobs as part of a cost purge that failed to impress investors, who focused instead on the bleak sales outlook and lack of free cash flow growth, driving the stock down the most in 15 months.

The former phone monopoly, facing price cuts mandated by regulators, political pressure to invest in faster broadband and rising inflation, forecast a flat dividend and a 2 percent revenue decline next fiscal year alongside a drop in earnings and free cash flow, as it boosts spending on fiber.

Chief Executive Officer Gavin Patterson told Bloomberg TV that from 2021 onward BT can probably see its Ebitda grow again and is committed to maintaining its dividend despite expectations it may be cut. “We’re signaling to the market that we think it will be unchanged for the next two years,” he said in the interview.

The stock fell as much as 10 percent and was down 7.8 percent to 220 pence as of 9:54 a.m. in London, the lowest intraday since October 2012. The company’s 1.3 billion euros of March 2026 bonds fell the most in three weeks, dropping 0.3 cents on the euro to about 101 cents, according to data compiled by Bloomberg.

“It’s the outlook” driving the plunge, said Jefferies analyst Jerry Dellis by phone, referring to BT’s free cash flow guidance coming in 10 percent below analysts’ estimates. The spending forecast that’s eating into its cash comes before any acceleration by BT of its fiber build targets, Dellis said, pointing to the risk the carrier will need to invest more.

The flurry of news releases Thursday morning by BT, alongside fourth-quarter and full-year results that were in line with expectations, follow a busy year of review and restructuring for Patterson, who’s been contending with demands on BT’s cash from all fronts while seeking to bounce back from an accounting scandal in Italy and early 2017 profit warning.

Patterson has already cut thousands of jobs, overhauled management and changed BT’s strategy for its struggling global services business, as the owner of the U.K.’s largest fixed network and biggest mobile operator seeks to get back in investors’ good books.

The strategy update was meant to answer uncertainty over BT’s outlook that had weighed on the stock, which is down 46 percent over the past two years, compared with a 4.4 percent decline for the Stoxx 600 Telecommunications Index.

BT now plans to eliminate 13,000 back office and middle management jobs but hire 6,000 front-line workers. That amounts to a 6.6 percent net loss to its work force of 106,400, based on the most recent annual report.

The company will also vacate its central London headquarters to focus on other sites. Annual savings from cost-cutting of about 1.5 billion pounds ($2 billion) are scheduled to take another two years to kick in.

‘Overweight’

“We’re too complex and we’re overweight and that’s why we need to make this change,” Patterson said.

BT blamed price cuts imposed by regulators on wholesale broadband offered by its Openreach network division for the bulk of next year’s forecast revenue and earnings decline. The company said it’s contending with intensifying competition in a U.K. telecom market nearing a saturation point for fixed broadband and mobile connections, where growth is below the rate of inflation.

The outlook was “woeful,” and the job cuts weren’t meaningful given BT is also hiring, said Dhananjay Mirchandani, an analyst at Bernstein.

“This management team has quite obviously run out of ideas for a simple and articulate equity story: one that springs few surprises and rests on consistent delivery capabilities without political and regulatory acrimony,” Mirchandani wrote in a note. “BT has now firmly gone from being a reasonably predictable growth story, an outlier in the incumbent landscape across Europe, to becoming a cost restructuring story.”

Pension Deficit

The bright spot, according to Mirchandani, was that BT has answered questions around how it will address its pension deficit for another three years after an agreement with its trustee. The carrier will owe top-up payments of 2.1 billion pounds over that period on a 11.3 billion-pound pension deficit.

BT will pay a final dividend of 10.55 pence a share, bringing the full-year dividend to 15.4 pence -- unchanged from the prior year, shy of the 15.7 pence forecast, according to data compiled by Bloomberg.

Fourth-quarter adjusted earnings before interest, taxes, depreciation and amortization rose 1 percent percent to 2.08 billion pounds.

©2018 Bloomberg L.P.

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