BT warns - shares slide

(By Richard Holway) BT shares have slumped 15% in early trading this morning, to just 108p, on the announcement that it is to take a £340m hit at BT Global Services as a result of the ongoing financial, contract and operational review of the business. It added that further ‘substantial’ charges may occur, depending on the outcome of the review.

As readers know, there has been substantial management change at BT Global Services following the departure of long term boss Andy Green to run Logica. First Frenchman Francois Barrault was appointed to run BT Global Services. Then Tim Smart (who effectively ran the largest, UK public sector, bit) left to be replaced in Aug 08 by Royston Hoggarth – See New appointment at BT Global Services. Then at the end of Oct 08 Francois Barrault resigned as CEO of BT Global Services and was replaced by Hanif Lalani (who was the Group Finance Director).

With all these management changes, it was obvious and indeed essential that a complete review of ongoing operations and contracts was undertaken. BT’s CEO Ian Livingston said on the concall this morning that 15 of the 17 largest contracts had been reviewed which had resulted in the £340m hit announced today. But, much more significantly, that left a further two where, once the reviews were completed in the next couple of quarters, further ‘substantial’ provisions might be required. How ‘substantial’? Well, “many hundreds of millions” was the answer.

Clearly, the assumption is that one of these two further contracts was BT’s NHS LSP contract. I remember well when BT won them and Sir Christopher Bland likened it to a dog chasing a car. Now the dog had caught the car, what does it do? These contracts were so outside the league that had previously been BT's stomping ground that many questioned BT's ability to price them correctly let alone their ability to complete them successfully. The NHS IT contract has been a poison chalice to so many companies – eg Accenture, Fujitsu. Now the value of BT has slumped by £1.5b today alone on its admission of these contract problems.

But, as I’ve also said on many occasions, the main issue is for BT Global Services finally to decide what it is for. It was an inability to answer that question that got them into their current mess. BT will never get themselves out of the mess unless they finally decide what kind of ‘IT Services’ company they want BT Global Services to be. Frankly, at this stage in the proceedings, a sale of much of the operations must be a decent option with HP/EDS being the obvious purchaser. Problem is that valuations are clearly somewhat south of what they could have been a couple of years back.