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. 