INVESTMENT EXTRA: BT - why you risk dialling T for trouble

By IAN LYALL FOR MAILONLINE
Updated: 16:52 EST, 29 May 2009

Temptation: But BT should be avoided at present

Is it time to buy into BT? More than two weeks have elapsed since Ian Livingston announced some extraordinary initiatives to revive the fortunes of the accident-prone phone company. 

He outlined plans for a swingeing cut to the dividend, more job losses and a resolution to long-standing worries over the pension. Oh, and there was a pledge to revive the troubled Global Services division.

After some initial scepticism, the City seems to be prepared to give Livingston a chance.

Deutsche Bank's respected telecoms analyst Robert Grindle reckons the company is becoming more 'investable' (if that really is a word) now the management have a credible and tenable action plan.

He rates the stock a buy, with a very punchy 130p a share price target (current price 87.4p). Now I wish I shared Grindle's optimism. Yes, BT has a plan. The hard part is implementing it. 

One potential stumbling block, and the source of so much pain recently, is the troubled global services arm.

This is the part of BT that was supposed to be fast growing. It provided bundled telecoms and IT services to big corporations such as Unilever and put it in direct competition with the likes of IBM and Accenture.

But it seems some of the contracts - most signed by Livingston's predecessor Ben Verwaayen - were horribly mis-priced. And this has led to a write-down in the value of the business of close to £2billion since October. 

The acid test for Livingston, and a huge catalyst for the shares, would be the first concrete signs of a sustainable turnaround at global services. Unfortunately, this may take some time.

The thorny issue of BT's gaping pension fund deficit was addressed with the pledge of annual payments of £525million into the pot.

Investors are sacrificing a large chunk of their dividend income to meet this liability.
Yet this doesn't completely solve the problem. There are two points here: the first is that the contributions to the retirement fund are for three years only and will be reviewed again in 2012.

It is hoped in that time the value of the fund's stock market investments will have recovered - narrowing the deficit and therefore bringing down the level of future payments. It is quite possible events will play out in this way - but it is by no means an iron-clad certainty.

And this brings me onto the second point about the BT pension deficit. We don't actually know how big it is. Yes, we have estimates putting the shortfall at between £8billion and £11billion. But until the results of the latest pension review are published in the summer, we are grasping at straws trying to quantify BT's liabilities. 

Earlier this week the company issued its annual report, revealing that Livingston and the departed head of global services, Francois Barrault, received £3.1million-worth of retention payments, payoffs and bonuses.

The debate over rewards for failure overshadowed a far more worrying list of risk factors buried away in the document. 

This line on page 31 stood out: 'We may be forced to refinance all or a portion of our indebtedness on or before maturity, reduce or delay capital spending or seek additional capital.'

There might only be a remote risk of any of this happening, but with total debts of £13billion, a BT fundraiser would require the mother of all rights issues. 

My reason for looking at BT was its lowly valuation - both in absolute terms and relative to its peers.

Even with the re-based payout, the dividend yield is something approaching 7 per cent. BT shares, meanwhile, trade at a bargain basement six times prospective earnings. Usually when the yield surpasses the prospective earnings in this way it is a raging buy signal.

But BT is a risky bet. It is a utility facing stiff competition in telephony and internet from some pretty formidable opposition - the likes of TalkTalk and Sky.

And of course there is the task of motivating a workforce whose morale has been sapped by a brutal round of redundancies that will ultimately claim 30,000 jobs.

So I'm not sure whether the share price adequately discounts the risks involved in buying into BT.

VERDICT: Avoid for the moment