BT: Bad Tuesday


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What's going on?

British telecoms giant BT saw its stock sell off almost 20% after it revealed a double-whammy hit of bad news to investors on Tuesday.

What does this mean?

Last October, BT announced that it had discovered some accounting irregularities at its Italian subsidiary, which it thought would cost it about £150 million to rectify. But after a deeper investigation, BT said on Tuesday that the cost will be closer to £530 million – a figure that will materially impact its near-term earnings. But that wasn’t all: BT also revealed that the outlook has significantly deteriorated for the part of its business that services big clients like the UK government.

Why should I care?

The bigger picture: Like other companies, BT is threatened by competition laws.

Unlike its business-facing division, BT’s consumer-facing arm and Openreach, the broadband infrastructure provider owned by BT, appear to be doing relatively well (investors will know more when BT reports its full results on Friday). However, Britain’s competition regulator has said that BT has to legally separate itself from Openreach because the potential for BT to unfairly treat consumers is too high (as it controls both a large telecom provider and the major infrastructure network). Much like Qualcomm and Aetna, it’s another example of competition laws posing a risk for investors.

For the stock: The real problem is probably BT’s deteriorating outlook, not its accounting scandal.

Sure, a £530 million charge isn’t particularly pleasant for investors to swallow, but it’s a cost that a company as big as BT can absorb. The bigger problem is that a meaningful part of BT’s business – serving big corporates and the UK government – appears to be shrinking (BT expects profits in that division to fall more than 10% this year).

Originally posted as part of the Finimize daily email.

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