Corporate Restructuring of British Telecom

Corporate restructuring can take a number of different forms varying from split ups to equity carve outs, however in this project we will be focusing on the spin off form of corporate restructuring. We will be looking at the telecommunications industry and analysing the company British Telecom. We have chosen this industry because in the last few years there have been major changes in the way this industry operates and BT seems to be at the centre of all this.

British Telecom has undertaken many corporate restructurings time but we will be looking specifically at the spin off of mmO2 on the 19th of November 2001. Strictly speaking though, it is a split up as two entities emerged after the restructuring, rather than a new entity with an existing one, as is seen in spin-offs. However, we will discuss this case as being one of a spin-off because the one of the resulting entities assumed most of the characteristics of the previous company.

We have tried to take a step-by-step approach by first analysing the industry environment and the specific conditions under which BT operates. Thus we attempt to take a well-rounded view in determining the causes, impact and post-performance of the restructuring Previous studies show that share prices tend to react favourably to spin off announcements (especially when it is a focus increasing spin- off, as is the case of BT). We therefore also expect to see our results to be similar to previous studies on focus increasing spin offs.

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Company Description:

Telephone services in almost all of the UK were, until 1981, provided by the Post Office, which was a government department until 1969 when it was established as a state public corporation. In 1981, the postal and telecommunications services of the Post Office became the responsibility of two separate corporations, with British Telecommunications - under the trading name of British Telecom - taking over the telecommunications business. As a result of the Telecommunications Act 1984, British Telecommunications plc was incorporated in England and Wales under the Companies Acts 1948 to 1981, on 1 April 1984, as a public limited company wholly owned by the UK Government. The transfer of property, rights and liabilities of the corporation to British Telecommunications plc was made on 6 August 1984.

BT Group plc is the listed holding company for the BT group of companies and was formed when the mmO2 business (comprising what had been British Telecommunications plc's mobile activities) was demerged on 19 November 2001. It is listed on the London and New York stock exchanges. It is one of Europe's leading providers of telecommunications services. Its principal activities include local, national and international telecommunications services, higher-value broadband and internet products and services, and IT solutions. In the UK, BT serves over 20 million business and residential customers with more than 29 million exchange lines, as well as providing network services to other licensed operators.

As a global communications provider, BT offers a full range of services, including local, national and international telecommunications services, high-value broadband and internet products and services, IT solutions and customer support. There are three main parts to BT's strategy. First is its customer-oriented approach. Second, they have broadband focus at the heart of BT as they want to decrease their level of dependence on their fixed landline segment. Third; they strive towards having rigorous financial discipline. BT seeks to deliver the highest levels of customer satisfaction performance and reduce the number of dissatisfied customers each year while achieve organic profitable revenue growth, while carefully controlling capital expenditure. They seek to be cost leaders while transforming their network for the 21st century.

BT's business is affected by a number of factors, not all of which are wholly within BT's control e.g. occurrence of a natural calamity. Although many of the factors influencing BT's performance are macro economic and likely to affect the performance of businesses generally, some aspects of BT's business make it particularly sensitive to certain areas of business risk. If BT's activities are subjected to significant price controls, its market share, competitive position and future profitability may be affected. It also faces strong competition in UK fixed network services, as regulators have promoted competition in this area by allowing BT's competitors to site equipment in or adjacent to its exchanges to make it easier for BT's customers to route some or all of their calls over competitors' networks.

Deal Rationale:

BT demerged its Wireless business, which included its mobile operator division BT Cellnet, in a major restructuring move with effect from 19th November 2001. The step was taken under the direction of the CEO Sir Peter Bonfield, amid a concerning rise in debt levels of the group and widening divergence of interests with the BT wireless division headed by Peter Erskine. There seemed to be a conflict in the strategy of the BT group, whose core business is in fixed landlines, and its Wireless division operating in technologies like the mobile phones which are increasingly a substitute for the formers product. By this move, the shareholders of the BT group received 1 share in the newly listed mmO2 (previously the BT mobile phone business) for every share held in the existing BT Plc. Based on the first day's dealings on the London Stock Exchange, BT Group represented approximately 78% of the equity value of the former BT group and mmO2 represented approximately 22%.

Pre Spin-off performance:

The BT group had been witnessing a dissipation of its return on equity which fell from 18.69% for year ended 31st march 1997 to 13% for ended 31st march 2000, before turning negative in year ended 2001 at -12.87%. This was mainly due to rising competition from substitute mobile networks like Vodafone and Orange, dilution of market share as a result of pressure from the UK telecom regulatory body Ofcom, as well as increased leverage in the capital structure and the high capital expenditures connected with the procurement of the 3G mobile licenses. The following table provides some key ratios for BT and its competitors for years 1997-2003.

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