Analysis: BT faces dilemma over debt

Debt-ridden BT has found itself in a corner as the current downturn in the telecoms market shows no sign of abating. The once-rich telco may have to offer the City a fall guy or two if it wants investors to cough up more funds. If, on the other hand, it wants to save chief executive Sir Peter Bonfield's head, it could always ask the government for its 3G money back.

BT has accumulated debts of £30bn -- impressive even by beleaguered dot-com standards. Bonfield has pledged to pay off £10bn of that by the end of 2001. The original plan, announced as part of the big BT shakeup in November, was to sell off a quarter of its Yellow Pages business and a quarter of BT Wireless, but with Orange proving that wireless floats in the current tech climate are liable to sink, BT may have to rethink that plan.

The restructuring and sell-off announcements, described by Bonfield as the telco's most radical move since privatisation, were accompanied by a cutback in its global investments and was intended to raise BT's ailing share price. That didn't happen and pundits now suggest BT will have to go for total rather than partial sell-offs of its assets.

BT is now likely to attempt to raise funds from its shareholders in the form of a rights issue of shares. In order to get any more money out of investors BT may have to offer up a sacrifice -- this will most likely be the architects of those sell-off plans, chief executive Sir Peter Bonfield and chairman Sir Iain Vallance. While GartnerGroup analyst Adam Daum feels this is extreme, he notes that it would also make sense. "It is a bit dramatic to suggest both of them but for the last three years they have been talking about floating off bits. They have given themselves enough rope to hang themselves with," he says.

To save themselves they will have to provide their long-suffering board with a damn good explanation for why they haven't achieved what they said they would points out Daum. BT should not, however, rush into a night of the long knives. "If they resign tomorrow it could precipitate a crisis rather than be a solution," warns Daum.

The current situation BT finds itself in has arisen because of the huge £4bn fee it paid for its 3G licence. Experts have criticised the UK government for allowing the fees to go so high and Daum suggests a radical plan to save the crippled mobile firms. "Perhaps the government ought to give back some of the money made from 3G," he suggests. This seems unlikely given that chancellor Gordon Brown has already earmarked the £20bn the government made from the sell-off for paying off its own debt.

An alternative is to make wireless -- and 3G in particular -- attractive to investors, says Lars Goddell, analyst with research firm Forrester. "It would help to show some healthy adoption rates on WAP or GPRS," he points out. With BT announcing delays to its GPRS rollout and little good news about WAP, that seems unlikely. Suggestions that the desirability of 3G services have been exaggerated will do nothing to increase investors' enthusiasm.

BT's debt problem is not about to go away and Daum feels the best solution could be to sit out the current crisis in telecoms stock. "The share price is so low that they are not going to get the value of a float. They have missed countless opportunities and now might try and ride the storm," he says.

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