The challenge facing BT’s new boss

Outgoing BT boss Philip Jansen set in motion radical cost cuts at the telecoms company. The pressure is now on his successor Allison Kirkby to execute a turnaround that investors are counting on to boost languishing returns.

Kirkby’s in-tray includes improving BT’s ailing business division, dealing with the potential merger of two rivals, and fending off competition from the challengers snapping at its heels as it races to roll out full-fibre broadband across the UK. 

The Glaswegian, who spent most of the past decade turning around former state-owned telecoms monopolies in Scandinavia, faces the daunting task of trying to restore the FTSE 100 company’s share price, which has fallen around 45 per cent since Jansen took over in February 2019. 

Chief among Kirkby’s tasks is improving the performance of BT’s business unit, created from a merger of its global and enterprise divisions last year with the aim of saving £100mn by 2025. Analysts say the division, which serves small and medium sized businesses and public sector customers badly needs to increase revenue.

Paolo Pescatore, founder and TMT analyst at PP Foresight, said Kirkby will “want to have a razor sharp focus on the execution” of that aim because otherwise “the writing is on the wall” for the unit, one of BT’s three main divisions. 

In November, it posted a 11 per cent fall to £806mn in adjusted earnings before interest, taxes, depreciation and amortisation for the six months to September 30, compared with the previous year. Pescatore said BT appeared not to be exploiting its competitive advantage on its networks or cyber security capabilities.

That month BT Business’ chief executive Bas Burger acknowledged previous promises of growth had “not all materialised” and there were plans to “radically simplify” the business. 

A European telecoms executive said the now combined divisions were “problem areas” that “need to be turned around”.

When she takes over next year, after four years as a BT non-executive director, Kirkby will be combating discontent on multiple fronts, including from Kintbury Capital, which is shorting the company. 

In December the hedge fund’s chief executive Chris Dale told the Sohn conference “debt keeps rising and we’re basically in an unsustainable financial position”, adding the telecoms group’s “core profitability is under pressure”. Dale said Kirkby should cut the dividend and possibly accelerate its rollout of full fibre broadband.

Kirkby will also need to bring the company’s own staff onside, following a rocky period last year in which employees went on strike for the first time in more than 30 years. 

John Ferrett, national secretary of Prospect union, said: “The last few years at BT have felt like a period of never-ending reorganisation and Prospect members would welcome a prolonged spell of relative stability.” Although a pay deal in September improved morale, he said impending cuts of up to 42 per cent of the company’s 130,000-strong workforce by the end of 2030 were a concern.

BT is undertaking a cost cutting programme that it said in November had delivered £2.5bn in annualised savings, and was on track to meet a £3bn target by its 2025 financial year.

Two of the biggest shareholders, billionaire Patrick Drahi’s Altice and Deutsche Telekom, are being closely watched too. Drahi is under pressure to sell assets at his heavily indebted telecoms company, while Tim Höttges, Deutsche Telekom’s boss, told the Financial Times earlier this year that buying a stake in BT was the “biggest mistake” he had ever made.

BT’s £15bn plan to roll out high-speed broadband to 25mn homes by 2026 is in better shape, described by HSBC analysts as the “key driver of value in the BT investment case”. The company is halfway to that goal and is planning to reach up to 30mn premises by the end of 2030, but competition from smaller rivals is intensifying.

Kester Mann, director of consumer and connectivity at CCS Insight, said it would be up to Kirkby to “continue that deployment and also to monetise it”, emphasising the need for customer uptake. Its take-up rate was a third in December.

Meanwhile, dozens of alternative network providers or “altnets” have sprung up, with BT warning earlier year that it could lose more of its broadband customers than expected this financial year. Jansen said BT was losing out to rivals who built full fibre to homes first in rural areas.

Mann added there was “lingering uncertainty” among investors about whether the investment in full fibre rollout would offer a return. He said it was “the biggest concern” shareholders have and the main reason why the share price had recently “struggled so much”.

BT said it was “confident that we can support our progressive dividend and that we will see a material uplift in our cash flow once our peak full fibre build is completed in December 2026”.

The company’s consumer unit EE could also face intense competition if a domestic merger between Vodafone and CK Hutchison-owned Three is approved. EE is the biggest source of revenue for the group, bringing in £4.9bn in the first half of this financial year. It plans to start selling kitchen appliances from next year and expand its other goods and services as part of a brand refresh and marketing push.

Pescatore said there would “need to be some results” from that move, adding BT could also face challenges in converting BT broadband households to EE. BT last year announced all consumer units would be moved under the EE brand.

With shares down about 50 per cent over the past five years, Justin Funnell, telecom analyst at Nextgen Research, said the company was “potentially vulnerable to a bid” as it was “at the deepest part of the fibre investment curve and the pension deficit [has been] brought down to manageable levels”. BT in November announced the funding shortfall in its retirement scheme had more than halved to £3.7bn, from £7.98bn three years ago.

As for Jansen, he told reporters in November he was looking forward to his “first” day off in 35 years once he steps down.

When asked about regrets, he said he was “disappointed . . . that the share price is where it is”. Ultimately, this is the metric that Kirkby is also likely to be judged on.

Additional reporting by Sally Hickey