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LONDON (Alliance News) - BT Group PLC Friday reported a strong increase in third-quarter pretax profit that beat analysts' expectations, but saw its share dropped as it agreed a 16-year recovery plan to plug its pension scheme deficit, including pumping in GBP2.0 billion over the next three years.
The telecommunications company, which is in talks to acquire the UK's largest mobile network EE, said it is making good progress on due diligence, but declined to give any further updates on the takeover. It also declined to give details on its bidding stance for the upcoming Premier League football TV rights, other than to say it is determined not to overpay.
That left questions over its future cost base.
"The looming costs of bidding for football rights, acquiring EE Ltd and having to pump a further GBP2 billion into the company?s pension fund have dominated traders thinking," IG Market analyst Alastair McCaig said.
BT shares were down 2.2% at 419.80 pence Friday morning, one of the worst-performing stocks in the FTSE 100 on the day.
BT said it has reached an agreement with the trustee of its pension scheme on the 2014 triennial funding valuation, and a 16-year recovery plan for the pension scheme. The funding deficit of the scheme was GBP7.0 billion on June 30, 2014, BT said. Over the next three years it plans to pay a total of GBP2.0 billion into the scheme, and then for the seven years from 2018 to 2024, it will make payments in line with its previous 2011 agreement.
Following this it will make five annual payments of GBP495 million through to 2029, and a final payment of GBP289 million in 2030. BT said it had also discussed details of the potential EE acquisition with the pension trustee.
The enormous pension deficit for the formerly state-owned company looms large just as BT is trying to expand its offerings to become one of the major players in the UK commercial TV and communications market. Like several rivals, it wants to be able to offer consumers a so-called quad play of TV, broadband, mobile and fixed line telephony. It recently launched a sports channel with the aim of boosting subscriber numbers for its TV service in competition with Sky PLC.
On a call with journalists Friday morning Chief Executive Officer Gavin Patterson stressed that the pension deficit recovery plan will not effect the company going into the upcoming English Premier League rights auction. The payments going into the scheme over the next three years are less than it has paid in the previous three years, which were GBP2.6 billion, Patterson said.
BT and the trustee will review the funding of the scheme again in 2017, and said that if the deficit is lower than the remaining recovery plan, this will be reflected in a new recovery plan.
BT said it is making "good progress" on its due diligence in relation to the potential acquisition of EE. BT is in talks to buy the Orange and Deutsche Telekom AG joint venture for GBP12.5 billion. It plans to fund the acquisition through cash and shares, with Deutsche Telekom to take a 12% stake in BT, and Orange a 4% stake. The acquisition would bolster BT's planned re-entry into the consumer mobile market after more than a decade's absence.
BT said that its own plans to launch a consumer mobile offering "remain on track". Patterson confirmed to journalists that the launch is planned before the end of BT's fiscal year. "Clearly the fact that we are hoping to conclude a deal with EE will have an impact on our thinking on how to really drive that," Patterson told journalists, although he declined to provide further details on how the EE deal might alter its consumer mobile plans.
Rival Sky Thursday also announced plans to enter the mobile market, announced a multi-year deal with Telefónica UK Ltd for wholesale access to 2G, 3G, and 4G services over its 02 mobile network. Sky plans to launch its first mobile services to customers in 2016.
Patterson told journalists that he was "not hugely surprised" by Sky's announcement. Before BT announced it was in talks with EE, it had also been considering a potential acquisition of 02.
BT posted a pretax profit of GBP694 million for quarter to end-December 2014, up from GBP617 million a year before, ahead of consensus analyst expectations of GBP658 million, although revenue fell to GBP4.48 billion, from GBP4.60 billion, just missing analysts' expectations of GBP4.49 billion. The rise in pretax profit came from a reduction in operating costs before depreciation and amortisation of 5%.
BT attributed the decline in revenue to the timing of contract milestones within its BT Global Services business, which bolstered its third-quarter results last year. BT Consumer revenue was up 7%, driven by growth in broadband and television, whilst BT Business declined due to lower call and line volumes.
The company improved its consumer fixed line losses to 60,000 in the quarter, compared with 85,000 a year before, and added 119,000 retail broadband customers during the quarter. It added 209,000 retail fibre broadband customers during the quarter, takings its customer base to over GBP2.7 million. In the just over a year since it launched BT Sport, 25,000 pubs and bars have signed up for the service, BT said.
Analysts expect costs to inflate at the upcoming premier league auction as BT faces Sky for the highly coveted rights. Patterson told journalists that the company is very concious of the risks around the auction, but is also concious of how the rights can add value for its customers, and added that it won't overspend to get the rights it wants.
BT Wholesale saw an improvement on the second quarter, but continued to be hit by telecoms regulator Ofcom's narrowband market review. Openreach saw revenue decline due to regulatory price changes offsetting growth in fibre broadband.
BT continues to expect its full-year earnings before interest, tax, depreciation and amortisation to be between GBP6.2 billion and GBP6.3 billion, with further growth expected in the following year. It expects to see normalised free cash flow of more than GBP2.6 billion this year, and for this to grow in the following year.
The company intends to grow its dividend by 10% to 15% in both this year and next, and maintain its share buyback of around GBP300 million this year, and in the two following years, which it hopes will counteract the dilutive effect of employee share options plans that are maturing over the same period.
BT also outlined plans to deliver faster broadband for homes and small businesses through the deployment of what it calls "G.fast" technology, which it plans to test in two pilot locations starting this summer.
The technology will deliver speeds of up to 500 megabits per second to most of the UK within 10 years, BT said, and deployment will begin in 2016 and 2017 if the pilots are successful.
By Hana Stewart-Smith; hanassmith@alliancenews.com; @HanaSSAllNews
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