BT had some good news for the market today: a near-40% jump in profits, amid further signs that CEO Ian Livingston has managed to get the problems in its Global Services division under control. Unfortunately, this was rather overshadowed by the telecoms giant’s admission that its pension deficit has ballooned to a massive £9bn – and that it has to shell out over £500m a year for 17 years to plug the gap. With investors not unreasonably worried that this is going to be a serious drag on performance for years to come, it’s no surprise that BT’s share price has plunged today…
Let’s start with the good stuff. Although revenues for the third quarter were down 4% to £5.2bn, this was actually less of a drop than analysts expected – and Livingston’s efficiency drive has resulted in a substantial boost to the bottom line, with pre-tax profits up 39% to £466m. Better still, it looks as though its much-maligned Global Services arm is finally starting to recover from its previous woes. Livingston said the results show BT is ‘making progress… [although] there is still a lot more to be done’.
Sadly, that was about as good as it got. Separately, BT announced that its pension fund deficit had tripled to £9bn by the end of 2008. That’s less than some pensions experts had predicted – and BT says the valuation is a conservative one (i.e. it doesn’t really think it’s that big). Nonetheless, as part of a new deal with trustees, it will take BT 17 years to get its house in order – it will require payments of £525m a year for the next three years, rising to £583m in 2012, and then again by 3% year-on-year for the subsequent 13 years.
The news sent its share price crashing 7%, and it’s not really surprising. That’s a substantial chunk of annual profits to be pouring into the pension fund every year, and will inevitably affect BT’s ability to invest in the business and pay dividends to shareholders (although BT insists it’s generating enough cash to do all of the above). There’s also a possibility that the Pension Regulator could force it into an even faster repayment schedule – apparently it has ‘substantial concerns’ about the latest agreement, though we don’t know exactly what yet.
Meanwhile the competitive landscape in the UK gets ever tougher. Last night ntl:Telewest re-launched itself as Virgin Media Business ahead of a big push into the UK corporate telecoms market – and it must be serious, because Sir Richard Branson himself turned up to cut the metaphorical ribbon. So despite the signs of progress, Livingston, we presume, still has plenty to worry about.
In today's bulletin:
BT's giant pension deficit will take 17 years to plug
Diageo sales flat as drinkers shun premium brands
Thomas Cook cashes in on dodgy Redknapp advert
Browne: CEOs need better work/ life balance
Editor's blog: The not-so-beautiful game