City backs BT break-up but £6bn rescue rights

 angers small investors



 By Michael Harrison, Business Editor



 11 May 2001



 British Telecom investors

 gave a guarded welcome

 yesterday to the group's

 decision to spin off its

 mobile phone business,

 scrap the dividend and raise

 £6bn through a

 record-breaking rescue

 rights issue. 



 But there was dismay

 among BT's army of 1.7

 million small shareholders at

 the prospect of having to

 take up their rights or see

 their holdings in the

 company diluted.

 Private-client stockbrokers

 also warned of mass

 confusion among retail

 investors, many of whom

 have held their investments since privatisation in

 1984, over the deeply discounted rights issue. 



 Shares in the debt-laden company fell 7 per cent.

 But they still ended the day comfortably above the

 level to which they should in theory have fallen, as

 BT unveiled plans to issue nearly 2 billion new

 shares at 300p ­ a 47 per cent discount to

 yesterday's opening price ­ through a three-for-10

 rights issue. The shares closed at 528p ­ a fall of

 40p on the day but 4 per cent above their

 theoretical ex-rights price. 



 Standard Life, one of BT's biggest shareholders,

 welcomed the radical restructuring, in which BT

 Wireless will be demerged before the end of the

 year with a value of around £20bn, leaving the

 group's UK retail and wholesale businesses and its

 transatlantic joint venture Concert in a new

 company dubbed Future BT. 



 Donald Butcher, president of the UK Share, said

 he feared that some of BT's small investors would

 snap up the shares, wrongly thinking they were

 being sold at a bargain price. One shareholder,

 52-year-old sales manager Dennis Maunder,

 summed up the feelings of many: "I'm totally pissed

 off with it.... It sounds to me like we are going to

 have to prop them up." 



 Sir Christopher Bland, BT chairman, acknowledged

 that the huge cash call and the decision to suspend

 dividend payments were painful pills for investors,

 but he called the decision "a regrettable but

 necessary step". He added: "This is as much in the

 interests of small shareholders as large ones." 



 Standard & Poor's, the credit-rating agency,

 immediately lowered its rating on BT's debt from

 single A to A minus and warned of a further

 potential downgrade now that BT was spinning off

 the wireless business, which had offered the best

 prospects for future revenue and earnings growth. 



 BT has already lost its former chairman Sir Iain

 Vallance, who was forced to quit as the price of

 City support for the restructuring. But BT's

 much-criticised chief executive Sir Peter Bonfield

 said he had no intention of going before his

 contract expires at the end of next year. "I am not a

 quitter," Sir Peter said. "Critics are good ­ they

 force you to do all sorts of things." 



 Sir Peter also said he believed he could work well

 with Sir Christopher, who has pledged to invest £1m

 of his own money in BT shares: "I admire [his]

 drive and ambition, I think things will work fine." 



 The huge rights issue ­ three times bigger than

 anything seen before in the UK equity market ­

 will be launched later this month and close in June.

 With proceeds from the issue, asset sales already

 announced and proceeds from selling the directories

 business Yell and much of BT's property portfolio,

 the group expects to cut its £29bn debt by £15bn. A

 further £4bn is to be saved by scrapping the

 dividend, lowering interest repayments, saving on

 costs and cutting capital spending by £500m. BT's

 finance director Philip Hampton also said up to £2bn

 of the group's debt could be loaded into BT

 Wireless. 



 The remaining business, Future BT, will comprise

 the group's UK retail and wholesale divisions, the

 consumer internet arm BTopenworld, BT Ignite for

 business customers and Concert, the AT&T joint

 venture. 



 The debt reduction will be accompanied by a £575m

 cost-saving plan expected to result in a further 5,000

 job losses and a £500m cut in capital spending. 



 BT said it expected Future BT to have debts of

 £15bn to £20bn by the end of March next year,

 indicating that the group will still be cash negative. 



 Private-client stockbrokers forecast confusion and

 chaos as the 110-page prospectus spelling out the

 rights issue was sent to shareholders. "Many people

 will be confused about their options," said Roddy

 Kohn of the Bristol-based brokers Kohn, Cougar.

 "There will be plenty of people who have held

 shares for a very long time, perhaps even from

 flotation, and will find themselves in a position

 where they are not sure of taking up all the shares

 because the price has fallen from £15 to £5." 



 BT, which was sold off in 1984, is the first big

 privatised company to carry out a rights issue, so

 this will be the first for many of its shareholders.

 The average shareholding in BT is worth £470, and

 nearly a fifth of the shares are held by small

 investors. Retail investors can subscribe in full for

 their rights, sell them in the market or do nothing,

 in which case BT's advisers will sell the rights on

 their behalf. 



 BT said it expected to save tens of millions of

 pounds by not having the rights issue underwritten

 in the City. But the cost of the rights issue,

 including telephone investor helplines, is still put at

 £52m by BT. 