BT to float four divisions in biggest shake-up since 1984 privatisation

Proposals fall short of full break-up * £10 billion of assets to be sold * Retail and wholesale arms to be split

British Telecom yesterday dramatically scaled back its global ambitions when it launched a broad reorganisation, including a £10bn debt reduction programme, which will see it float four business divisions, beginning next year. The moves mark the biggest changes at the company since it was privatised in 1984.

British Telecom yesterday dramatically scaled back its global ambitions when it launched a broad reorganisation, including a £10bn debt reduction programme, which will see it float four business divisions, beginning next year. The moves mark the biggest changes at the company since it was privatised in 1984.

BT plans to raise at least £5bn from flotations of 25 per cent stakes in BT Wireless and Yell, the directory services operation, which is expected to come to market early in 2001. BT also plans to raise a further £5bn from disposals of minority mobile and other network interests outside of Japan and western Europe.

Initial public offerings of 25 per cent of BT Ignite, the wholesale internet and business services arm, and of a new wholesale network entity called NetCo are expected within 18 to 24 months.

Sir Peter Bonfield, chief executive of BT, expressed optimism that BT, which has been criticised for being imbued with a civil service culture, was changing. "I'm at heart a decentralist and this is the track I want to move BT down. It's a big, big change of culture." He added: "This is a big 140,000 person company. It's a big-assed company. Does it move at the speed of a 10-person company? Clearly not. But part of BT can operate at just the same speed as small companies."

Talks are under way with the Department of Trade and Industry and Oftel about gaining approval to hive off NetCo, which will comprise BT's local loop infrastructure and national network.

For now, BT is not planning a full disposal of Netco in order to retain the operation's strong cash generating ability. But it is likely that Netco and the central holding company, which will retain the current stock market quote, will pay dividends after the separation is completed.

Sir Peter said: "I am announcing the acceleration of BT's transformation through a radical and unprecedented restructuring of the business. In fact, I'd go as far as to say that we're being more radical than any other telecoms operator in the world. The businesses will be better placed to prioritise and pursue the main opportunities for growth which will be in wireless, broadband and internet protocol, and within Western Europe and Japan."

Job losses overall at BT will continue at around 5,000 a year, as they have in recent years.

The number and complexity of the initiatives seemed to confuse the City. Investors initially marked BT stock up 2.4 per cent before sellers gained the upper hand, leaving the shares to close down 39p, or 5 per cent, at 749p. That was despite the release of slightly stronger than expected second-quarter to September results which showed pre-tax profit nearly halving to £471m from £890m a year earlier.

Sales, boosted by fast-growing start-ups in Europe and interests in Japan Telecom and J-Phone, rocketed 43 per cent to £7.6bn. The interim dividend was unchanged at 8.7p compared with previous annual growth of around 7 per cent.

Analysts rendered a split verdict on the restructuring. Paul Mount of Nomura International expressed disappointment: "We would see higher value in companies with narrow product focus and broad geographic focus. BT will seem to have neither," he said.

Mark Lambert, analyst with Merrill Lynch, said "the split of the UK business, the tighter focus and the intended IPOs are an attempt to improve execution across the group." He noted, however, that it will "take at least 12-18 months to execute these plans and longer for the benefits to materialise."

BT was also arranging to resurrect a multi-billion dollar bond issue, which was cancelled earlier this year amid a downturn in telecoms stocks. US investment banks Merrill Lynch and Morgan Stanley are marketing the issue which could raise more than £8bn. It will help BT finance its debt mountain - expected to hit £30bn by March.

The restructuring means that BT, like AT&T and WorldCom last month, now realises that the telecoms market is changing too quickly for big, integrated groups to react. "We can't run it as a totally integrated operation," Sir Peter said. "It's too complicated and it's moving too fast. We have to decentralise to get businesses closer to the technology and closer to the market segments."

The businesses included in the proposed wholesale NetCo arm and its retail counterpart will depend on regulatory decisions from Oftel and the DTI. At the interim stage, the operations together accounted for sales of £7.1bn and operating profit of £2.76bn, about half of group sales and 75 per cent of operating profit.

Commenting on BT not giving separate figures for the wholesale and retail arms, Robert Brace, the outgoing finance director, said: "It's all terribly artificial. We'll draw up the lines between NetCo and retail after [regulatory approval]."

Sir Peter said the key aim of the restructuring was to maintain economies of scale and keep cash flow within the group. "It's my intention that the businesses are run separately. But there are synergies, so it's a matter of getting the balance right. It is intended to keep the cash flow centrally managed."

He also urged that regulation of the group should change. "We should be regulated in a way that assumes we aren't vertically integrated."

Oftel said it will support moves to give consumers a better deal by making the telecoms market more transparent and competitive. "Greater transparency through structural separation can make an important contribution to this goal. Once the full regulatory implications have been identified, we will consult fully with the industry and consumers about any necessary changes to the regulation of BT's business."

Sir Peter said: "Netco can be transformed into a high growth company." He noted that it could sell services to a large number of rival telecoms groups. "This is not primarily to get out from under regulation. It's to unleash the energies of the company. We keep the flexibility. We keep the scale. But we get huge benefits from separation."