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.