Bloated BT must shape up or suffer

Results day for BT used to be such a simple affair. The management would file into a press conference, announce a tidy set of figures, field a few questions on growth and technology, and that was it - everyone was happy.

Results day for BT used to be such a simple affair. The management would file into a press conference, announce a tidy set of figures, field a few questions on growth and technology, and that was it - everyone was happy.

But things won't be that simple when BT's chief executive Sir Peter Bonfield and his team announce their results on Thursday.

BT has become the Diego Maradona of the telecoms industry. Where once it was a nimble, innovative and sure-footed player on the technology field, today the former state monopoly is slow and bloated, saddled with ballooning debt and a plunging share price. It has tripped up one too many times for the City spectators.

BT has missed out on bidding for an Italian third-generation mobile licence due to in-fighting within Blu, the consortium in which it holds a 20 per cent stake. It has been roundly attacked for dragging its heels in providing high-speed internet access. And it has allowed rival mobile firms to nibble away at BT Cellnet's market share.

Analysts predict that this week's results will add to its woes, with an estimated 9 per cent fall in second-quarter pre-tax profits on the same period last year. But BT's major shareholders - which include Mercury Asset Management, Prudential and Legal & General - have had enough. They are not prepared to stomach another depressing set of figures. They want to hear of change, of new strategies and restructuring. Says one leading investor: "We need more than just numbers. We need to know just how Bonfield and Co are going to turn the company around. If we don't get an answer then we won't keep quiet."

For nearly a year Sir Peter and his senior team have been working on a secret plan to overhaul the ailing business, widely expected to be revealed next week. This will aim to address three fundamental problems - BT's debt mountain, internal management issues and its corporate structure.

Sporadic spending on stakes in overseas companies, combined with the astronomical cost of paying for new mobile phone licences, means that by the end of 2001 BT will owe the banks £30bn. This has caught the eye of the credit rating agency Standard & Poor's, which in August downgraded BT from "AA+" to "A". Critically, however, the agency didn't go for the widely anticipated "A-", and this, say BT's shareholders, indicates that large disposals are in the pipeline.

"It's obvious that when S&P paid a visit, BT revealed parts of its strategic plan, otherwise its rating would have been downgraded further," says one institution.

According to SG Equity Research, BT could raise at least £10bn from disposals, including its stakes of 18 per cent in Spain's Airtel, 26 per cent in France's Cegetel and 44 per cent in India's Bharti Telecom. Last week Bharti said it was prepared to buy out BT's stake.

Nigel Hawkins, an analyst at Williams de Broe, comments: "BT is still full of bureaucracy and needs a lot more effort to get the old carthorse moving." The man many tip to do this is Philip Hampton, who last month replaced former finance director Robert Brace after sustained shareholder pressure. Mr Hampton, modest and straight talking, is a rarity among BT's senior executives. Highly regarded in the City, he successfully demerged British Gas into BG and Centrica.

Some institutions, however, still have another BT scalp in mind. "The next thing for BT to do is replace Sir Iain Vallance [BT's chairman]. I would like to see a younger, fresher chairman brought in," says one shareholder.

Sir Iain joined the GPO, out of which BT was born, in 1966 straight from Oxford University. His critics say that he is slow to make decisions and too immersed in BT's civil service-like culture. His supporters - who include some shareholders - say that because of his experience, he should stay on to complete BT's restructure.

In April BT etched the fault lines for a potential restructure by separating its UK fixed-line business into wholesale and retail. On top of this it created four units: Ignite, its business internet unit; BT Openword, for mass-market internet; Yell, which includes Yellow Pages; and BT Wireless, which combines BT Cellnet and its international holdings. It is understood that BT is close to announcing a demerger of its wholesale business and a series of flotations next year. According to Lehman Brothers, the sum of BT's parts is worth £101bn compared to its market capitalisation of £51bn.

Not all BT's problems are down to the management. All over Europe, former state telecoms companies are suffering from a fall in domestic fixed-line telephone call charges, once their staple diet. The market for alternative revenues - such as mobile and business telecoms - is already cornered by more aggressive rivals.

But the City doesn't want to hear a sob story. It wants to see change and performance. As one source puts it: "If on Thursday we don't see signs of change, then BT will stand for 'Big Trouble'."