BT Group Plc delivered a one-two blow to investors by disclosing deeper accounting errors at its Italian unit that forced it to triple provisions and cutting its outlook for the coming years as the impact of Brexit works its way through government budgets.
The stock dropped as much as 19 percent, the most since 1986. The U.K. telecommunications company said a probe found more faulty accounting and "inappropriate behavior" in Italy than the company first identified in October.
Photographer: Chris Ratcliffe/Bloomberg
"We are deeply disappointed with the inappropriate behavior we found," in the Italian business, Chief Executive Officer Gavin Patterson said on a conference call. "The extent and complexity of inappropriate behavior was far greater than previously identified."
Patterson, in his fourth year as CEO, finds himself facing an expanding set of challenges, from the Italian scandal to Brexit, a ballooning pension deficit and an escalating battle with regulator Ofcom. While consumers are holding up well, the U.K.'s decision to leave the European Union is stoking inflation and squeezing the budgets of BT's clients, causing some of them to end contracts early. BT said in a statement that it now expects revenue for the fiscal year ending in March to be flat, after forecasting growth as recently as October.
For the coming year, BT reduced its target for normalized free cash flow by as much as 17 percent, to a range of 3 billion pounds to 3.2 billion pounds, from a target of more than 3.6 billion pounds issued in October.
On the call, Patterson apologized to investors for for what he called "headwinds" that were stronger than anticipated in the U.K. public-sector business, which serves clients in the national government and local-area councils, and in BT's international global services division.
The company will report earnings results on Friday that will show that consumer and other parts of the business are strong, Patterson said. "It is a mixed bag of results that we'll talk to you about later in the week."
BT declined 18 percent to 311.80 pence at 9:42 a.m. in London. At the low for the day of 308.55 pence, the drop eclipsed the shares' worst decline during the 2008 financial crisis, making it the biggest drop since at least January 1986. The former telecom monopoly went public in 1984.
While the company said third-quarter results are expected to be in line with market expectations, except for the impact of the Italy investigation, it lowered its targets for this year and next. In the U.K. public-sector and international corporate markets, "we now expect a double-digit year-on-year percentage decline in fourth-quarter underlying EBITDA," adjusted for the acquisition of mobile provider EE.
The Italy writedown, an increase from a previous estimate of 145 million pounds, will reduce third-quarter revenue and Ebitda by about 120 million pounds, BT said Tuesday in a statement.
BT's Italy division made up about 1 percent of revenue in the year ended in March 2016. It's part of BT's continental Europe business that makes up about 13 percent of revenues, according to data compiled by Bloomberg. The investigation that included a review by KPMG found "improper accounting practices and a complex set of improper sales, purchase, factoring and leasing transactions" that led the company to overstate earnings in its Italian business over a number of years, the company said.
Bloomberg News reported in September that BT had suspended two top executives while conducting the investigation, BT Italia CEO Gianluca Cimini and Chief Operating Officer Stefania Truzzoli, people familiar with the matter said at the time. The following month, BT said it was conducting an accounting probe at the Italian unit and was reassessing areas of management judgment after discovering historical accounting errors.
BT said the investigation revealed "improper accounting practices and a complex set of improper sales, purchase, factoring and leasing transactions." It's still assessing the impact of the adjustments on its current estimates and how they should be reflected in financial statements for prior periods. The company has appointed a new chief executive for its Italy business whom it didn't identify, to start on Feb. 1.
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