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The
following describes some of the significant risks that could
affect us. Additionally, some risks may be unknown to us and
other risks, currently believed to be immaterial, could turn
out to be material. All of these could materially adversely
affect our business, turnover, profits, assets, liquidity
and capital resources. They should also be considered in
connection with the forward looking statements in this
document and the warning
regarding forward-looking statements. These risks
include the risks relating to the BT Wireless business which
is proposed to be demerged.
Financing
To finance several significant
investments and acquisitions since November 1999, we have
substantially increased our outstanding debt. In part
because of this increase, our credit ratings were reduced
during the second half of 2000 and during May 2001. Any
further reduction in our ratings would increase our cost of
borrowings. Subsequent downgrades may hinder our ability to
expand and develop our business and may affect our ability
to raise short-term finance.
During the 2001 financial year our borrowings, less
short-term investments and cash, have risen from £8.7
billion as at 31 March 2000 to £27.9 billion as at 31 March
2001, primarily as a consequence of our cash investments in
3G mobile licences and from acquiring interests from our
former partners in European joint ventures.
Credit
rating downgrades
Due to this increase in borrowings, as well as decreased
stability and predictability of revenue streams from our new
business sectors such as mobile data services, the capital
expenditure investment needed to enhance our competitive
position in a fast changing technological environment and
the increasingly competitive nature of the UK
telecommunications market, our credit ratings on our
long-term debt and senior debt ratings were downgraded in
August and September of 2000 and in May 2001. This downgrade
in credit ratings has caused an increase in our borrowing
costs. Before goodwill amortisation the net interest charge
was covered 2.6 times by total operating profit for the year
ended 31 March 2001 down from 8.8 times in the year ended 31
March 2000. Our ratio of earnings to fixed charges (which
consists mainly of gross interest expense) calculated in
accordance with US GAAP has decreased from 5.9 in the year
ended 31 March 2000 to 0.2 in the year ended 31 March 2001.
Furthermore, our net debt has increased during April 2001.
In February 2001, Standard and Poor’s placed us on
“CreditWatch with negative implications”. Approximately
one-third of our debt (i.e. the debt that was issued after
the ratings downgrades in August and September 2000) is
subject to covenants which would increase the interest rate
if we were subjected to further downgrades. In addition,
further downgrades would increase the cost of future
borrowings, and subsequent downgrades may hinder our ability
to expand and develop our business and may affect our
ability to raise short-term finance.
Debt
reduction
We have indicated that we intend to reduce our debt by at
least £10 billion by 31 December 2001. Our ability to
achieve this will largely depend on the success of the
rights issue and our ability to effect our restructuring
programme including certain disposals. In November 2000, we
announced details of our restructuring plans to focus
resources on specific geographical areas and optimise the
positioning of our individual businesses within their
respective markets. We said we would focus on Western Europe
and Japan and float up to 25% of BT Wireless and Yell and
that a flotation of BT Ignite was possible, to be reviewed
by the end of 2001. In addition, we described proposals to
create a new holding company to enhance corporate
flexibility, and provide scope for further subsidiary
flotations where advantageous to shareholders. We also
detailed plans to create a new network company, NetCo, which
would be both structurally and managerially separate.
Following this corporate reorganisation, and subject to the
satisfactory outcome of necessary discussions with HM
Government and Oftel, our intention was to float up to 25%
of NetCo. Our aim was to reduce net debt of the group by
December 2001 by at least £10 billion using the cash
proceeds from the sale of equity in these various IPOs,
together with the proceeds of disposals of non-core
businesses and assets.
The weakness of the IPO market, particularly for
telecommunications companies, has caused us to review
whether the sale of equity in BT Wireless and Yell in an IPO
still constitutes the best option to strengthen our capital
base. In addition to the rights issue, we plan to demerge BT
Wireless (creating a new holding company at the same time).
On demerger the capital structure of BT Wireless is planned
to include up to £2 billion of net debt. We are reviewing
our plans for Yell and are currently considering proposals
to sell or demerge Yell. We continue with our programme of
non-core disposals which to date has included agreements to
sell our Japanese investments and our investment in Airtel
which, when completed, should reduce our net debt by £4.4
billion. Completion is conditional upon relevant regulatory
and other approvals in Japan and Europe. We have also
announced plans to realise the value of our UK property
portfolio through a sale and lease back transaction as well
as the sale of our London headquarters. We have also decided
that there will not be a final dividend for the 2001
financial year and that there will be no interim dividend
for the 2002 financial year. As a result, we believe we are
on track to meet our target to reduce group debt by at least
£10 billion by 31 December 2001 using the cash from
disposals already announced and the anticipated proceeds
from the rights issue. However, we cannot assure you that
these disposals will occur as planned or that the rights
issue will be fully taken up. The rights issue is not being
underwritten and therefore we are not guaranteed any minimum
proceeds from the rights issue which is due to close on 15
June 2001. We may not be able to achieve our intended debt
reduction if our plans do not succeed on the proposed terms
or take significantly longer to achieve than we anticipate.
If we do not achieve this reduction there is a likelihood
that our credit ratings will be further downgraded.
Notwithstanding our expectation that we should be able to
meet our £10 billion debt reduction target, we anticipate
that the ratings of the company are likely to be downgraded
because of the view taken of the prospects for our fixed
network business and for third generation services. We
believe, however, that the group will be able to maintain an
investment grade rating. We cannot assure you that the
successful implementation of the restructuring will have
this result.
In the course of the 2002 financial year, we expect net debt
to increase as a result of net cash outflows from our
planned capital expenditure and interest payments. However,
our debt reduction and cash generation focus continues and
our target is now to reduce net debt to between £15 billion
and £20 billion in Future BT by 31 March 2002. Proceeds
from our restructuring plan will be used to reduce net debt.
Our ability to pay dividends in
the future depends on the success of the new companies
created by our restructuring programme.
We have, since shortly after our incorporation in 1984,
annually paid interim dividends in February and final
dividends in September. The interim dividend we paid in
February 2001 was 8.7 pence per ordinary share, unchanged
from the previous year. However, as part of our debt
reduction and restructuring plans, we have decided that
there will be no final dividend in respect of the 2001
financial year and that there will be no interim dividend
for the 2002 financial year. The total cost of the dividends
for the 2000 financial year was approximately £1.4 billion.
We expect that Future BT will recommend a final dividend in
respect of the 2002 financial year.
Future dividends, if any, to be received by our shareholders
will depend on the progress of the individual companies
created by our restructuring programme. These companies will
determine their own dividend policies in accordance with
their respective capital structures, cash requirements and
the markets in which they operate. As a result, we can give
no assurance to our shareholders as to the level of
dividends, if any, to be paid after February 2002 by us, or
any of the new public companies created by our
restructuring.
We are undertaking a substantial
restructuring of our businesses to improve our position in a
rapidly changing market place. Our plans for the
implementation of the restructuring are incomplete in many
respects, and the success of the restructuring will depend
in part on factors that are beyond our control. As a result,
we cannot assure our shareholders that the goals of our
restructuring plan will be fully achieved. We also cannot
assure shareholders that completion of the restructuring
plan will result in the success of our strategy.
As discussed above, we are undergoing a major restructuring
of our business from a centrally organised one to one based
on several lines of business. Although the lines of business
were mostly established by 1 July 2000 and BT Retail and BT
Wholesale were split in October 2000, the detailed
organisation continues to be developed and changed. In
particular, we have not yet determined the exact form of the
new UK network company, NetCo, which is to take over the
majority of BT Wholesale’s activities and provide network
services to telecoms operators and service providers. Delay
in implementation of the restructuring may lead to the new
managements not being able to concentrate on developing
their businesses with certainty, or to pursue opportunities
in their respective marketplaces and may lead to staff
retention problems. As we refine the plans for our
restructuring, we may encounter significant obstacles that
we have not yet anticipated and that prevent us from fully
implementing the restructuring or fully achieving our
strategic goals.
Certain aspects of our restructuring plans require prior
consultation with our regulators, the Secretary of State for
Trade and Industry and the Director General of
Telecommunications who heads Oftel. We expect to conduct
extensive discussions with Oftel regarding our restructuring
plans. Depending on the outcome of these discussions,
regulatory restrictions may impact our ability to complete
the restructuring according to our existing plans.
We cannot assure our shareholders that we will be successful
in completing the restructuring as currently planned or that
we will achieve all of our strategic goals. Failure in this
regard could adversely affect our strategic and competitive
position.
We need to obtain a number of consents, approvals and/or
clearances before we can demerge BT Wireless. At this stage,
we cannot be certain that we will obtain these on acceptable
terms or within our proposed timetable.
For the BT Wireless demerger to proceed as planned, we need
first to obtain consents, approvals and/or clearances from:
our shareholders; the High Court of Justice in England and
Wales; the Department of Trade and Industry; the Inland
Revenue; and certain regulators.
We expect to seek shareholder approval at an extraordinary
general meeting to be held towards the end of 2001. Our
current intention is that the demerger of BT Wireless will
take place at the same time as the creation of a new holding
company which would be undertaken through a court approved
scheme of arrangement.
The trustee of certain of BT’s notes and bonds has
confirmed, having taken independent legal and financial
advice, that, subject to certain conditions being met, it
will not take any steps in relation to the demerger of BT
Wireless. The principal condition is the successful
completion of the rights issue; other conditions include the
information provided by us to the trustee remains accurate
and no new and materially adverse factor emerges. Further
certification will be required by the trustee prior to
implementation of the demerger. There can be no guarantee
that this certification will be obtained.
We can give no assurance that the rights issue will be
deemed successful by the trustee or that we will be able to
obtain the necessary consents, approvals and/or clearances
and consequently that we will be able to implement the
demerger of BT Wireless.
We have asked the Department of Trade and Industry to
confirm our expectation that our main telecommunications
licence, the BT Cellnet licence, and our 3G licence will
remain in effect after the demerger. There are also a number
of non-UK licences, including those for Viag Interkom and
Esat Digifone for which consent or notification will be
required. We will require certain clearances from the UK
Inland Revenue to confirm the tax treatment of the companies
involved in the demerger and for our shareholders on
demerger.
We are facing significant
competition in the markets in which BT Wireless operates,
which may reduce our revenues and profitability.
There is intense competition in all of the markets in which
BT Wireless operates. BT Wireless is competing with leading
global wireless operators as well as virtual network
operators, traditional fixed line providers, resellers of
wireless services and cable operators. In many countries new
competitors may also enter into their markets as additional
bands of spectrum and licences for wireless communications
may be auctioned or otherwise offered or sold by the
governmental authorities.
We expect that recent market trends in the
telecommunications industry, such as accelerating
technological convergence, will also intensify competition
in all existing markets, both from existing competitors and
new entrants. Continuing competition has and may lead to:
price erosion on products and services; reduction in market
share; loss of existing or prospective customers and
increased difficulty in retaining customers; increases in
handset subsidies; faster network expansion and upgrading;
and more rapid development of wireless technologies.
BT Wireless’s competitive position will depend also on the
efficiency and success of marketing and branding initiatives
and its ability to anticipate and respond to various
competitive factors affecting it, its competitors and its
industry. Such competitive factors include, amongst other
things, new services and products, network coverage, pricing
of wireless services and handsets, the quality of customer
service and changes in consumer preferences.
Any failure by BT Wireless to compete effectively or
successful competitive behaviour by its competitors would
have a material adverse effect on our operating results and
prospects for so long as BT Wireless remains within the
group.
If our subsidiary Viag Interkom
continues to incur losses, we may not realise a return on
our investment.
We have invested approximately £12 billion, mainly in the
2001 financial year, in Viag Interkom, our newly acquired
subsidiary business in Germany against which a goodwill
impairment charge of £3 billion was made in the year to 31
March 2001. Viag Interkom, a startup established in 1997,
has incurred losses in each of its completed financial
years. Viag Interkom has an estimated 7% share in the highly
competitive German mobile phone market as at 31 March 2001.
Under a licence it acquired in 2000, Viag Interkom is
required to develop a 3G mobile network in Germany. Although
the development of a 3G mobile network will require
substantial capital expenditure by Viag Interkom, we cannot
be certain that the demand for 3G mobile products and
services will justify the related costs or that Viag
Interkom will develop a competitive 3G network. We have not
managed a similar sized operation outside the United Kingdom
in recent years. We can give our shareholders no assurance
that Viag Interkom will cease incurring losses in the
foreseeable future, nor that we will be able to make an
economic return from our investment in the company.
Our investments in third
generation mobile licences and networks may not generate an
economic return.
We have invested approximately £10 billion in 3G licences
in the 2001 financial year, principally in Germany and the
United Kingdom. These licences are for the use of particular
parts of the radio spectrum for 20 year periods and are
required to enable us to provide advanced mobile data
services to our customers. We have given undertakings to
build a mobile network infrastructure to give a certain
level of geographic coverage in Germany, the United Kingdom
and The Netherlands. We expect that this will require a
further investment of up to £10 billion over a five year
period. Completion of this investment may be hindered by
more stringent planning controls over the siting of masts,
particularly in rural areas. In addition, we expect BT
Wireless to apply for a 3G licence in the Republic of
Ireland which will entail further licence and roll out
costs.
The technology for the new services is not yet fully
developed by the suppliers of the handsets and other
equipment to be used by us and our competitors in providing
the services. Developing 3G technology may take longer than
we anticipate and prove not to be superior to the existing
technologies. The size of the market for these services is
as yet unknown and may fall short of the industry’s
expectations. We cannot be certain that the demand for such
services will justify the related costs. In some locations,
the investment, although required under the licences, may
not be commercially desirable. In addition, we have a number
of significant competitors in each geographic market.
We expect to roll out our 3G network at the same time that
many of our competitors roll out their own 3G networks
throughout Europe. This, combined with the limited number of
suppliers of 3G network equipment, is likely to create high
demand for, and may extend the delivery times of, such
equipment, which may cause delays in the construction of our
3G networks.
The potential level of competition, together with these
uncertainties, means that we cannot give our shareholders
any assurance that we will make an economic return from our
investments in 3G licences or networks. In the event that we
fail to generate significant revenue from our planned 3G
mobile service offerings, we may not be able to meet
financial obligations incurred in relation to the 3G network
or otherwise and our business, financial condition and
results of operations may suffer.
We face strong competition in the
UK fixed network services.
We continue to have a significant market share in
some aspects of the UK fixed network services. In
particular, approximately 82% of exchange lines in the
United Kingdom were in our network as at 31 March 2001.
Regulators are attempting to promote competition in this
area by allowing other operators to site equipment in or
adjacent to our exchanges (local loop unbundling) and to
make it easier for our customers to route some or all of
their calls over competitors’ networks (carrier
pre-selection). Reduction in our market share in the fixed
network may lead to a fall in the group’s turnover and an
adverse effect on profitability. Unlike other operators, we
continue to be obliged by the current regulatory regime to
serve customers in the United Kingdom, whether or not such
provision of service is economic, and the two competitive
measures described above may have the effect of accelerating
the diversion of our more profitable existing customers
without us being able to reduce our costs commensurately.
These changes in the regulatory environment and ensuing
increased competition on our fixed network may cause adverse
effects on our business, results of operations, financial
condition and prospects.
If we are subject to significant
price controls, we may lose market share, competitive
advantage and our future profitability may be affected.
Most of our fixed network activities in the United Kingdom
are subject to significant regulatory controls. The controls
regulate, among other things, the prices we may charge for
our services and the extent to which we have to provide
services to our competitors. In recent years, the effect of
these controls has been to cause us to reduce our prices. In
addition, the regulators are considering bringing our UK
wireless operations under wider price control which may have
the effect of further reducing the prices we can charge for
mobile services. We cannot assure our shareholders that the
regulatory authorities will not increase the severity of the
price controls, or extend the services to which controls
apply, or extend the services which we have to provide our
competitors. These controls may adversely affect our market
share, the severity of competition and our future
profitability.
Our business depends on our
ability to exploit technological advances quickly and
successfully.
We operate in an industry with a recent history of fast
technological changes. We expect that new products and
technologies will emerge and that existing products and
technologies will develop further. We cannot predict the
actual effect of these technological changes on our business
or on our ability to provide competitive services. For
example, presently there is evidence of some substitution by
customers who use their mobile phones for day-to-day voice
calls in place of making such calls over the fixed network.
Additionally, some calls are now being routed over the
internet in place of the traditional switched network. If
these trends accelerate, our fixed network assets may be
used uneconomically and our investment in these assets may
not be recovered through profits on fixed network calls and
line rentals. Impairment write-downs may be incurred and
margins may decline if fixed costs cannot be reduced in line
with falling turnover.
Health concerns from mobile phone
handsets and masts may reduce customer demand and affect
profitability.
There has been speculation that mobile phone handsets give
off harmful radiation to their users and that transmitter
masts emit such radiation, adversely affecting the health of
people in their vicinity. Although research has failed to
provide evidence of any links between such radiation and
long-term harmful effects on people’s health, HM
Government has issued a guideline, suggesting that people
below the age of 18 should limit the time spent using mobile
phones and some schools have not allowed masts to be sited
on their premises.
Increased speculation regarding health risks or any
subsequent substantiation of such risks may result in an
adverse effect on customer demand, may affect the future
sitings of masts and/or may lead to legal compensation
claims or other liabilities. |
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