BT rings the changes

BT's chief for the past six years is to step down, to be replaced by his right-hand man. Despite Ben Verwaayen's successes, the job he leaves his successor is not an easy one, says Sarah Arnott

Ben Verwaayen, BT's chief executive, announced yesterday that he would be stepping down at the end of May, to be replaced by Ian Livingston, the head of the group's retail division.

In his six-year stint, Mr Verwaayen has presided over a crucial period as the former monopoly telecoms network, facing the inevitable decline of its core business, struggled to reinvent itself as BT Group – a voice telephony provider, broadband company, technology innovator and global IT services player. But despite considerable successes, the job Mr Verwaayen leaves his successor is by no means an easy one.

That there has been enormous progress is not in doubt. When Mr Verwaayen arrived in February 2002, after five years at Lucent Technologies, BT was in a woeful state. It was crippled by £30bn-worth of debt, the share price was languishing at 236p from a high of £13.65 at the end of 1999, and the final dividend had been scrapped altogether. Revenues were sliding in every area and broadband roll-out in the UK was one of the slowest in the developed world.

The picture is very different now. The group has seen 24 consecutive quarters of earnings growth and the dividend for 2007 was a healthy 15.1p. From 167,000 broadband connections in 2002, there are now more than 12 million and the UK is one of the most competitive markets in the world. And, alongside a more constructive relationship with the regulator, the pioneering strategy to establish the OpenReach network division has set an international example.

There was no shortage of plaudits yesterday when the news of Mr Verwaayen's departure was announced.

Sir Mike Rake, the BT chairman, described him as an "exceptional chief executive", a person "whose courage and leadership has transformed BT from being a deeply troubled organisation into a thriving business with global capability and a clear strategy for the future."

Arun Sarin, the chief executive of Vodafone, said: "Ben has done a tremendous job refocusing BT and positioning the company for the future world of converged communications."

And Stephen Carter, formerly the head of Ofcom and now the Prime Minister's chief of strategy, said: "Ben Verwaayen has been one of the fathers of broadband in this country. He is a formidable operator, and was at times a formidable opponent."

For his own part, Mr Verwaayen says his biggest success has been changing the culture of a company where staff used to be loath to admit to neighbours where they worked. "The most important thing is that six years ago people didn't feel proud about the company, but today we are a global company and people are proud to work for BT," he said.

But behind the rhetoric of reinvention, global reach and international pride, the future is by no means plain sailing. The share price, which never did return to pre-crash levels, has dropped by more than 100p since its high of 336.75p last July, prompting shareholder disquiet and speculation about future strategy options.

Mr Verwaayen blames wider economic uncertainty, and rubbishes speculation about the timing of his departure. "The suggestion is pure nonsense," he said. "Given how long it takes for a board to process appointments, and the time it took for me to come to my decision, there is absolutely no correlation with what has happened in the market," he said.

In many ways, Mr Livingston is a safe choice as successor. After several years as Mr Verwaayen's right hand man, he is committed to the same strategy. And he is equally dismissive of share price concerns. "Every quarter there is something – free broadband will be the end of the world, mobile substitution will be the end of the world, Global Services will never make any money. But when you look at BT Group overall, there is consistently good performance with quarter after quarter of earnings growth and a very decent dividend," Mr Livingston said. "The shift in the share price is down to the market. Ben's job, and now my job, is to manage the business and deliver the numbers – the share price, over time, takes care of itself."

But industry commentators are less sanguine. "The share price reflects serious reservations that will be on-going and that Ian Livingston will need to address," said one City analyst. "In many ways, the issues are Ben Verwaayen's strategy coming home to roost."

The local loop unbundling strategy pursued by Mr Verwaayen – under which rival operators can install equipment in BT exchanges – has boosted broadband competition and staved off the threat of regulator-sanctioned break-up. But it also means a drop in wholesale revenues, and even though it was expected, it is still unsettling the market. Third-quarter figures published in February missed analyst expectations by around £100m, largely because of wholesale revenue down a whopping 11 per cent. A key challenge for Mr Livingston will be to convince Ofcom to allow BT to raise OpenReach's prices to help compensate.

The other major external factor is the so-called fibre debate. With basic broadband availability not largely ubiquitous, attention is focusing on next-generation super-fast access. But the UK is lagging behind its European rivals because of bottlenecks in the last mile of the copper network, owned by BT. The company estimates that upgrading with high-speed fibre optic cables will cost around £10bn and discussions between government, industry and the regulator about how the upgrade be funded and managed are only just beginning. It is unlikely BT will be expected to foot the whole bill, but shareholders are spooked by the potential cost and risk.

But the biggest challenge is the strategy to look to growth in the Global Services division to replace dwindling revenues elsewhere. Global Services was the big success story in February's disappointing figures – with revenues up 6 per cent to £1.97bn – but there is still some way to go.

Martin Mabbutt, an analyst at Nomura, said: "Ben Verwaayen has done a good job of making the company a more competitive animal, but it is tough to turn it into a growth business because it fundamentally isn't. The spiel is all about being global, but the reality is that BT is mostly a domestic company in terms of where profits come from."

Global Services represents around 30 per cent of the group's revenue – or £7.3bn of the overall total of £20.2bn in 2007 – but overall earnings before interest, tax, depreciation and amortisation were £5.6bn, of which only £724m was from the services division. The target is for a 15 per cent profit margin. But it is proving elusive and Francois Barrault, the chief executive, admitted last month that the 2009-10 timeframe may not be met.

The rush for a higher margin may also face resistance from within the IT industry. BT does considerable amounts of work in partnership with third party systems integrators, who view askance a strategy that looks like pushing up their costs.

Gavin Patterson, who is currently group managing director of BT's consumer division, will take over Mr Livingston's old job of head of BT Retail and will join the board on 1 June.

BT shares outperformed the overall European telecoms sector yesterday, closing up 1.52 per cent at 233.25p.

BT's new boss seen as a safe pair of hands

The appointment of Ian Livingston as BT Group's chief executive comes as little surprise after some months of speculation about Ben Verwaayen's departure. Mr Livingston was widely tipped as a likely successor and the 43-year-old Scot is viewed as a safe pair of hands. "He has done good things and is highly thought of so it was no surprise to anyone when he was appointed – although it was a well-kept secret even at the highest levels," said one industry insider. After six years at Dixons, Mr Livingston joined BT as group finance director in 2002 and was promoted to chief executive of the retail division in 2005. He has worked closely with Mr Verwaayen and helped develop the group strategy he will now be responsible for pursuing. But although the overall plan is unlikely to change in the short term, the style of the company's management probably will. "Ian Livingston has been Ben Verwaayen's right hand man, but he is a very different personality," Martin Mabbutt, an analyst at Nomura, said. "Mr Verwaayen is excitable and inspirational, whereas Mr Livingston is a more down-to-earth type." The return to profit-ability of BT's retail business is central to Mr Livingston's solid reputation. "At the time he took over, Retail was viewed as being in terminal decline," Mr Mabbutt said. But the most recent quarterly revenues showed growth of 2 per cent to £2.15bn.