Almost £8bn or more than a fifth was wiped off the stock market value of BT after the telecoms group revealed that an accounting scandal at its Italian business was much worse than originally thought.
The company also warned of a slowdown in some of its other operations, with international corporate clients cutting back after the Brexit vote and UK government departments reducing their spending. As a result, profits would be £300m lower than previously expected.
The Italian problems mean the company’s remuneration committee will examine bonus payments previously paid to leading directors, including the chief executive, Gavin Patterson, which were based on targets that may not now be met. It may also seek to claw back payments given to senior Italian executives, a number of whom were initially suspended and have now left the business. BT’s European head, Corrado Sciolla, reportedly resigned on Tuesday, but the company would not comment on this.
It also emerged that Italian prosecutors were opening their own investigation into BT Italia over alleged false accounting and embezzlement.The company said the improper behaviour in Italy was “an extremely serious matter” and added: “The remuneration committee will consider the wider implications of the BT Italy investigation.”Patterson earned £5.3m last year including an annual bonus of just over £1m and share awards worth £3m. The finance director, Tony Chanmugam, who was already due to step down in July, received £2.8m, including a £587,000 bonus.
BT’s shares fell 79.55p or 20.7% to 303p on the news, its biggest ever one day fall and its lowest level since June 2013. The company’s shares are among the most widely owned on the UK stock market, with a large number of small investors who have held on since the company was privatised in 1984. About 700,000 of its 827,000 shareholders own 1,600 shares or fewer.
A number of US law firms specialising in shareholder class action suits immediately said they were looking at whether BT had violated federal laws. Following these problems, BT said it now expected a double-digit fall in fourth quarter earnings, adjusting for the recent £12.5bn acquisition of mobile group EE. Full-year profits are now expected to be about £7.6bn, compared with earlier estimates of £7.9bn, and flat next year.
The mismanagement in Italy, where BT has operated since the 1990s, emerged over the summer when the company was approached by a whistleblower.
The company said in October it had discovered “inappropriate management behaviour” in its Italian division, which would cost it £145m. Now, just days before its third-quarter results on Friday, it rushed out a statement saying the total cost was put at £530m.
An investigation by KPMG found: “The extent and complexity of inappropriate behaviour in the Italian business were far greater than previously identified.”
The inquiry found “improper accounting practices and a complex set of improper sales, purchase, factoring and leasing transactions”, which meant earnings in the Italian business had been overstated for a number of years.
On top of the Italian review, BT said it was conducting a broader investigation into financial processes, systems and controls across the whole group.
The company said it “needs to reflect” on why the improper behaviour was not spotted by BT Italy’s management, the wider group, or by its auditors.
Patterson said it was investigating its other overseas business but he believed the problem was specific to Italy. He said it was a very complex set of manipulations, involving a lot of people over many years.
Major shareholders including Standard Life and Legal & General refused to comment but Royal London Asset Management, which owns 0.9% of BT, said: “[The] announcement from BT surprises us on a number of counts. Firstly, BT is a strong company with a relatively predictable business and so not generally prone to these kinds of warnings. Secondly, given the modest scale of the Italian business, the magnitude of the hit it has caused is concerning. Finally, the warning that spending by government and corporate customers has shown some signs of softening is the sting in the tail of the announcement.”Deutsche Telekom, which has a 12% stake in BT after the sale of its stake in EE to the UK company, would not comment apart from saying: “Deutsche Telekom is following developments at BT closely.”
Analysts at Haitong said the warnings on Italy and the outlook were “a bitter disappointment”. They said: “These two issues are far from the most consequential drivers of BT’s share price at current levels: we think regulation and the pension deficit remain much more important determinants of BT’s net present value.
“BT said that prospects for the rest of the group … remain good, but management should have brought forward third-quarter 2017 results (out this Friday) to talk much more expansively about this. Not doing so, we think, was a mistake.”
Mike van Dulken, the head of research at Accendo Markets, said: “Last October’s suggestion of a £145m charge didn’t cause too many ripples as regulatory issues and a rising pension deficit hogged the headlines.
“[This] admission adds this to these nasty headwinds, especially as it could weigh on profits for the next two years. Even management isn’t sure what the final figure will be.”
Van Dulken said BT still expected to increase its dividend by 10% for the next two years, but it was unclear whether that would satisfy disgruntled shareholders who, before Tuesday, had seen the company’s share price lose more than 20% since the start of 2016.
