Wednesday 25 January 2017 10:48 pm

Problems mount for BT as US lawsuits are filed and Italian prosecutors kick-off investigation

Telecoms giant BT has been hit by at least two US lawsuits after admitting to a £530m black hole in the accounts of its Italian arm.

The lawsuits have been filed on behalf of shareholders, Reuters reported tonight, accusing BT and three executives of securities fraud.

Earlier today Italian prosecutors confirmed they had opened a criminal inquiry into the huge writedown. The British firm could come under pressure from shareholders to simplify its overseas operations, in light of the accounting scandal.

Embezzlement

Veteran investigator Fabio De Pasquale will lead the inquiry into allegations of false accounting and embezzlement after the telecoms giant revealed the extent of the writedowns on Tuesday.

BT's stock settled yesterday after plummeting 20 per cent on Tuesday. Shares briefly dropped below 300p in morning trading, before ending the day slightly down at 302p.

Meanwhile, speaking to City A.M., one of BT’s top 10 largest investors said it was time the company considered reining back its international operations and refocusing on the UK.

"Would they be better off paring back that business, reducing the complexity, focusing back on the UK and a small number of multinational customers globally?" the shareholder said, on condition of anonymity.

I think that is definitely going to be the direction that management are going to be pushed in.

Bonus clawback

An external investigation by KPMG is ongoing with the full extent of the scandal yet to be quantified. In the meantime BT is calculating how the writedown should be allotted to current or previous year financial statements.

Bonuses paid to the company's top executives in previous years could be clawed back if it turns out BT's performance was not as strong as previously thought.

"It is only fair that when you go back and restate previous results for the actual underlying profitability of the group, as opposed to just Italy, that the portion of bonuses that were earned for beating targets that weren’t beaten should be clawed back," the investor said. "I think that’s completely reasonable."

The bottom line

The tremors felt by BT’s announcement on Tuesday extended beyond Italian borders, with City investors concerned the accounting scandal overshadowed broader and more systemic problems at the group.

Coupled with the Italian announcement, BT revealed full-year group profits would be £300m worse than expected.

"The more surprising thing was the underlying trading piece,” one investor told City A.M. “Quite how much worse the higher-end corporate and the public sector markets in the UK have got is the bit that is really surprising.”

BT also revealed cashflow would take a £500m hit.

The downgrade to the cashflow guidance is really chunky. That was definitely a surprise.

All of this is against a backdrop where cash is increasingly in demand.

BT said it would continue to target 10 per cent dividend growth, even though it is facing tough negotiations with trustees this spring over its £9.5bn pension deficit and £9.6bn of debts associated with the purchase of mobile firm EE.

If that wasn’t enough, there is the regulatory battle with Ofcom over the future of Openreach, BT’s cash cow, which owns much of the UK’s telecom infrastructure.