For BT, the end justifies the means



 By Jason Nisse



 13 May 2001



 If this were the US, then Philip Hampton, Sir Peter

 Bonfield and perhaps even Sir Christopher Bland

 would be facing prosecution, or even jail. The

 Securities and Exchange Commission has an

 offence called "conditioning the market" ­ that is,

 talking about a securities transaction before you

 actually announce the details to the market as a

 whole. In that context, BT didn't so much condition

 its £5.9bn rights issue, as give it a shampoo and set

 with highlights.



 In the weeks before the event, BT's tone changed;

 the rights issue went from being a "last resort" to

 being a "favoured option". In the days before,

 leading shareholders were sounded out at the

 offices of Cazenove (which they will know well, as

 most of these investors are also shareholders in the

 broker).



 They knew they would have to stump up cash for

 BT, which is no doubt why they are pressurising

 Cable & Wireless to give 'em some of its potential

 £7bn money mountain. Graham Wallace would be

 wise to resist this. Cash is king in telecoms these

 days.



 For many a small shareholder, the rights issue came

 as a surprise, if not a shock. The deep discount

 structure is the City's version of demanding money

 with menaces. If you do not stump up, you are

 likely to lose out. Average losses for the 1.75 million

 small investors in BT could be £300, or £525m in total.

 The most BT has saved by not issuing shares at

 close to its current price and asking the City to

 underwrite the fund raising, is about £100m. Is that

 fair?



 This is something ProShare, the body that

 represents small shareholders, or the Financial

 Services Authority, the regulator, should do

 something about. The average investors see the

 City as a cosy cartel which they cannot break into

 and so are handicapped when they invest. BT has

 more small investors than any company, other than

 Halifax. It has a duty to treat them fairly, which it

 clearly has not done.



 Ultimately BT's rights issue is a "good thing",

 however badly it has been executed. It enables BT

 to engage with the financial markets and its own

 industry, on a sensible footing. For the last few

 months it has been completely on the defensive,

 unable to act while its main rivals ­ Vodafone,

 France Telecom and Deutsche Telekom ­ have

 been snapping up all sorts of opportunities.



 BT needs to make decisions for commercial

 reasons, not because it has massive debts. Stephen

 Byers and Moody's did not help it much on Friday

 ­ the Yell ruling probably knocked a billion off that

 business's sale price, while the ratings agency will

 cost BT £30m a year. A few weeks ago, this would

 have been a disaster. This weekend it is a hiccup.



 BT has now developed a credible strategy for

 recovery. It should not be blown off course. It has

 to demerge BT Wireless, not sell it to Telefonica or

 whoever comes round the door. It should give BT

 Future as much debt as it dare, and then continue

 the demerger process. The end of the tunnel is in

 sight.