Risk Management for British Telecom Essay

Tutor: Herbert Windsor Group member: Zhu Dan Chen Yanran Varga Klaudia Fulop Meszaros Introduction of British Telecom Organization BT Group plc (formerly known as British Telecom and still occasionally referred to by that name), is the privatized UK state telecommunications operator. It is the dominant fixed line telecommunications and broadband Internet provider in the United Kingdom. BT operates in more than 170 countries and almost a third of its revenue now comes from its Global Services division.

BT Group is the largest communications service provider in the United Kingdom. It is also one of the largest communication companies in the world. The Company is listed on the London Stock Exchange. Once upon a time, BT Group rivals could have “fit into one of the company’s signature red phone booths”. Though competition has taken a toll, BT Group still wears the crown as the UK’s leading telecommunications carrier. The BT Group offers local and long-distance phone service through nearly 22 million access lines (comprising about 15 million residential and more than 6 million business connections).

It also provides Internet access and other data services, with more than 12 million broadband lines in operation. Through its Open reach unit, BT provides local network services. BT Group operates primarily in the UK, but its empire spans 170 countries including key markets in Western Europe and North America. By 2001, BT faced an embarrass situation that with a debt of ? 30 billion, much of which was acquired during the bidding round for the 3rd generation mobile telephony (commonly known as 3G) licenses.

It had also failed in its series of proposed global mergers, and the funds flowing from its then virtual monopoly of the UK market place had been largely removed. It was also headed by two executives who had little support from the London Stock Exchange, particularly in light of a 60% drop in share price in sixteen months. The economic and financial environment Most of the group’s current turnover is invoiced in pounds sterling, and most of its operations and costs arise within the UK.

The group’s foreign currency borrowings are used to finance its operations. Of these borrowings, approximately 19. 1 billion was swapped into sterling. Cross currency swaps and forward foreign exchange contracts have been entered into to reduce the foreign currency exposure on the group’s operations and the group’s net assets. The group also enters into forward foreign exchange contracts to hedge investment, interest expense, purchase and sale commitments. The commitments hedged are principally US dollars, the euro and the yen.

As a result of these policies, the group’s exposure to foreign currency arises mainly on the residual currency exposure on its non-UK investments in its subsidiaries and ventures and on any imbalances between the value of outgoing and incoming international calls with Concert. (Concert Communications Services was a $1 billion joint venture between BT and MCI since 1994. ) The majority of the group’s long-term borrowings has been, and is, subject to fixed interest rates. The group has entered into interest rate swap agreements with commercial banks and other institutions to vary the amounts and period for which interest rates are fixed.

The long-term debt instruments issued in December 2000 and February 2001, BT’s annual interest charge would increase if BT’s credit rating was to fall by one credit rating category by both agencies below a long-term debt rating of A3/A minus. BT early announced in April 2000 that they would restructure their operations, by separating the UK fixed-network business into two businesses and forming four new international businesses to operate and manage BT’s broadband, internet, wireless and directories businesses. After the issues came up, they attempted to create confidence in the management team.

Philip Hampton joined as CFO, and in April 2001 Sir Iain Vallance was replaced as Chairman by recognized turnaround expert Sir Christopher Bland. The company then began to sell off or sell and lease back a large part of its assets. Meanwhile, in early January 2000, Concert, their global venture 50/50 owned with AT&T, was established. As a consequence, BT took a 30% interest, jointly with AT&T, in Japan Telecom, acquired the remaining 40% interest in BT Cellnet which it did not already own, and acquired control of Esat Telecom Group, a leading Irish communications group.

The AT&T ownership interest in Japan Telecom has been acquired by Vodafone in April 2001 and in May 2001 they agreed to sell their interest in Japan Telecom also to that company. On 10 May 2001, BT announced an intention to demerge BT Wireless later in 2001 to create two separately listed companies; the first, BT Wireless, will comprise our controlled wireless operations in Europe, and the other, Future BT, will be a focused European network and retail business concentrating on voice and data services. They also announced on 10 May 2001, a rights issue from shareholders and those were halting the payment of dividends for the time being.

These steps combined with asset disposals, including the sale of the investments in Japan, are designed to reduce net debt in Future BT. BT’s Loss BT’s loss of 27. 7 pence per share for the year ended 31 March 2001 (the 2001 financial year) Earnings for the 2001 financial year were affected by net exceptional charges of 39. 6 pence per share, primarily relating to goodwill impairment and mobile subscriber acquisition costs written off partially offset by the profit on disposals of investments and rates refunds. Of the earnings in the 2000 financial year, 0. pence per share represented net exceptional income. The results for the 2001 financial year reflect the higher interest charges which have arisen from BT’s recent investment in new businesses and new third-generation mobile licenses, as well as losses incurred by the newly acquired businesses and the adverse effect which competitive pressures have had on their operating margins in the UK fixed-voice telephony and wireless markets. In both the 2001 and 2000 financial years, BT benefited from the strong growth in demand for the group’s products and services.

Internet and wireless phone usage expanded rapidly and this led to increased turnover. However, the initial losses incurred by many in their development stages are, as anticipated, adversely affecting the group’s results. They continue to be affected by the tight regulatory regime in the UK. The 2001 financial year has been dominated by the restructuring of their previously centrally organized business into several decentralized lines of business, by our acquisitions of interests and mobile licenses in Europe and by the consequent increase in net debt. Causes of losses The lines of business pic] The group’s profits are derived predominantly from BT Retail and BT Wholesale’s fixed network business in the UK. The profit from BT Wireless’s mobile network in the UK is largely offset by losses being incurred in establishing its networks in Ireland, The Netherlands and Germany. BT Ignite and BTopenworld are both in a development stage incurring losses. BT retail Turnover from fixed-network calls was declined by 4. 3% in the 2001 financial year. Fixed-network calls comprise all calls by customers made from fixed lines in the UK, including outbound international calls.

In both the 2001 and 2000 financial years, call volume growth was more than offset by the effect of significant price reductions. Price reductions had an impact on turnover from fixed-network calls for all the years under review. In the 2001 financial year, the principal reductions were in the prices for most types of geographic calls. Other reductions included enhanced discounts and lower Freefone and Lo-call prices charged to other service providers. The combined effect of the price changes to fixed-network calls. Operating costs

Total operating costs increased by 35% in the 2001 financial year to 20,759 million after increasing by 15. 4% in the 2000 financial year. As a percentage of group turnover, operating costs, excluding goodwill amortization. These exceptional costs are considered separately in the table below and the discussion which follows [pic] Staff costs increased due to numbers of employed in the group increased to 137,000 at 31 March 2001. Over 5,800 people left the group on voluntary release and other incentive terms and some 3,000 people transferred to joint ventures.

Higher pension costs and the annual pay awards were the main reasons for the increase in staff costs. . The depreciation charge increased by 12. 6% in the 2001 financial year after increasing by 5. 3% in the 2000 financial year, reflecting BT’s continuing high level of investment in its networks and, in the 2001 financial year, the acquisition of its new businesses. Goodwill amortisation in respect of subsidiaries and businesses acquired since 1 April 1998, when BT adopted FRS 10, and amortisation of other intangibles amounted to 386 million in the 2001 financial year compared with 89 million in the 2000 financial year.

Payments to other telecommunication operators grew by 24% in the 2001 financial year to 3,802 million. The growth in these payments was primarily as a result of the growing number of calls originating on or passing through BT’s networks and terminating on UK competitors’ fixed and mobile networks. This is due, in particular, to the increase in mobile phone usage and internet-related calls. Other operating costs, which rose by 20% in the 2001 financial year, include the maintenance and support of the networks, accommodation and marketing costs, the cost of sales of customer premises equipment and redundancy costs.

The increase in costs in the 2001 financial year is mainly attributable to the other operating costs of acquired businesses. Group operating profit Group operating profit for the 2001 financial year was lower than in the previous year, principally due to the goodwill impairment charge. The reduction in profit in the 2001 financial year was caused by reduced call prices, increased lower margin wholesale business with other operators, the losses incurred by our newly-acquired businesses and higher redundancy costs.

Earning (loss) and dividends Basic losses per share, based on the loss for the 2001 financial year were 27. 7 pence. Earnings before goodwill amortisation and exceptional items were 20. 5 pence per share for the 2001 financial year. As part of BT’s debt reduction and restructuring plans, the Board has decided that there will be no final dividend in respect of the 2001 financial year and that there will be no interim dividend declared for the 2002 financial year. Errors by the organization

To finance several significant investments and acquisitions since November 1999 (Japan Telecom and J-Phone and control of Esat Telecom), BT Group had substantially increased its outstanding debt. During the 2001 financial year BT’s borrowings, less short-term investments and cash, had risen from 9. 7 billion as at 31 March 2000 to 17. 9 billion as at 31 March 2001, primarily as a consequence of their cash investments in 3G mobile licences and from acquiring interests from their former partners in European joint ventures.

Due to this increase in borrowings, as well as decreased stability and predictability of revenue streams from the new business sectors such as mobile data services, the capital expenditure investment needed to enhance their competitive position in a fast changing technological environment and the increasingly competitive nature of the UK telecommunications market. BT’s credit ratings on the long-term debt and senior debt ratings were downgraded in August and September of 2000 and in May 2001. This downgrade in credit ratings had caused an increase in their borrowing costs.

In February 2001, Standard and Poor’s placed the firm on “CreditWatch with negative implications”. Approximately one-third of BT debt was subject to covenants which would have increased the interest rate if they were subjected to further downgrades. In addition, further downgrades increased the cost of future borrowings, and subsequent downgrades could have set back their ability to expand and develop business and had affected the ability to raise short-term finance. As written before, BT Group had intended to reduce its debt by at least ? 0 billion by 31 December 2001, by making a successful rights issue and a restructuring programme including certain disposals (e. g. demerging BT Wireless). The company couldn’t assure that these disposals would occur as planned. As for the rights issue, given the weak IPO market, particularly for telecommunications companies, could have easily turned out to be a failure if not fully taken up. It wasn’t underwritten and therefore BT wasn’t guaranteed any minimum proceeds from the rights issue which was due to close on 15 June 2001, after the 2001 financial year.

The company was faced to not being able to achieve the intended debt reduction if its plans didn’t succeed on the proposed terms or the plans took significantly longer to achieve than anticipated. Then there was likelihood that its credit ratings could have been further downgraded. One reason for the downgrade was the failure of the several proposed global mergers. BT proposed a merger with MCI and AT&T, both of which failed for different reasons. Moreover, another very important element in the downgrade of BTs shares was the drop in their shares.

In the previous year-and-a-half several mistakes of the management led to a 60% drop in share prices. A further risk was that the investments in third generation mobile licences and networks might not have generated an economic return, in which approximately ? 10 billion was invested, because technology for the new services hadn’t been fully developed at that time, and proved not to be superior to the existing technologies. Effects on other commercial organizations

In late 2000 the BT and its joint venture, AT&T boards fell-out – partly due to each partner’s excess debt, and the resulting board room clear-outs – partly due to Concert’s $800 million annual losses. AT&T recognized that Concert was a threat to its ambitions if left intact, and so negotiated a deal where Concert was split in two in 2001: North America and Eastern Asia went to AT&T, the rest of the world and $400M to BT. BT’s remaining Concert assets were merged into its BT Ignite, later BT Global Solutions group.

In June 2001 BT’s directory business was sold as Yell Group to a combination of private equity firms Apax Partners and Hicks, Muse, Tate & Furst for ? 2. 1 billion. A large demerger followed in November 2001, when the former mobile telecommunications business of BT, BT Cellnet, was hived off as a separate business named “mmO2”. This included BT owned or operated networks in other countries, including BT Cellnet (UK), Esat Digifone (Ireland), and Viag Interkom (Germany). All networks now owned or operated by mmO2 (except Manx Telecom) were renamed as O2.

The de-merger was accomplished via a share-swap, all British Telecommunications plc shareholders received one mmO2 plc and one BT Group plc (of which British Telecommunications is now a wholly owned subsidiary) share for each share they owned. British Telecommunications plc was de-listed on 16 November, and the two new companies started trading on 19 November. It also sold stakes in Japan Telecom, in mobile operator J-Phone Communications, and in Airtel of Spain to Vodafone. Facing a significant competition in the markets There is intense competition in all of the markets in which BT Wireless operates.

BT Wireless is competing with leading global wireless operators as well as virtual network operators, traditional fixed line providers, resellers of wireless services and cable operators. In many countries new competitors may also enter into their markets as additional bands of spectrum and licences for wireless communications may be auctioned or otherwise offered or sold by the governmental authorities. REFERENCES: Last accessed at 22nd April http://www. btplc. com BT Group’s Homepage http://news. bbc. co. uk/1/hi/business/1322290. stm http://www. wikipedia. org