BT insists Italian scandal is under control

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BT insists Italian scandal is under control as profits plunge (Telecoms group’s chief refuses to say if he will hand back any of his bonuses as it is confirmed Europe head has resigned)

BT’s chief executive has sought to reassure angry investors that an accounting scandal in Italy that wiped £8bn off the company’s market value is under control, but refused to discuss whether he should pay back some of the bonuses he received during the period of mismanagement.

Announcing a 37% slump in third-quarter profits, the company confirmed that its European head, Corrado Sciolla, was to leave in the wake of the scandal.

“Corrado is leaving the business, this happened on his watch,” the company said.

Gavin Patterson, the chief executive, said shareholders had a right to be angry at the scandal but maintained that the rest of the business, which accounted for 90% of profits, was doing well.

“Frankly, I am angry that the integrity of BT has been undermined by the wrongdoing of a few individuals in one part of the business,” he said. “Many shareholders are angry. They have a right to be. What happened in Italy was completely unacceptable. The situation is now under control.”

On Tuesday, the company revealed the mismanagement in Italy was worse than it had originally thought when it told investors about the scandal in October, and said it would now cost £530m rather than £145m.

Patterson would not be drawn on whether he felt he should take some accountability by giving back any bonus payments.

BT’s remuneration committee has launched an investigation into whether leading executives, including Patterson, should have any bonus payments clawed back for missing targets after the company delivered profit warnings for the next two years.

“That is a matter for the remuneration committee,” he said. “What we are doing today is focusing on fixing the issues in Italy. Ninety percent of the business is doing well. We are focused on managing the business and [the] remuneration [question] is not for today. We will cross that bridge when we get to it.”

Patterson earned £5.3m last year, including an annual bonus of just over £1m and share awards worth £3m.

BT is facing at least two shareholder lawsuits in the US, accusing the company and its senior executives of securities fraud. On Thursday, the ratings agency Moody’s downgraded its outlook for BT to “negative” to “reflect the company’s weaker operating performance over the medium term”.

Patterson said on Friday: “It is fair to say the last few days have been difficult. We are providing assistance to the authorities. BT remains in good health. We remain confident in our strategy. We need to keep this in perspective.”

The mismanagement in Italy, where BT has operated since the 1990s, emerged over the summer when the company was approached by a whistleblower.

BT’s audit committee and the external auditors PWC did not pick up the improper accounting practices, but Patterson said he was not going to bring PWC’s contract to a premature end.

“It is far too early to be making a decision about their future,” he said. “It is fair to say that in a couple of years we need to go through a [review] process but we will deal with that at the time.”

BT brought in KPMG to perform forensic accounting duties in its investigation which revealed the full cost of the scandal.

“It can be very challenging to find out unless you’ve got forensic accountants and that’s what we’ve done in the last quarter,” said Patterson. “We’ve really got underneath this issue, we’ve scaled it, we’ve sized it and now we’ve acted.”

Patterson also refused to explicitly rule out a sale if the Italian business cannot be successfully restructured, but said he believed BT could turn the operation around.

“We will need to go and look at cost base in some detail but we are confident we can get it to a profitable position,” he said. “If we can’t we will look at all options for the business going forward [including a sale]. At this stage I am confident we can get it to a profitable position.”

The third-quarter results showed a 37% fall in pre-tax profits to £526m, with the fallout of the scandal and a slowdown in UK public sector work and international corporate business overshadowing better results elsewhere. The figures included record revenue growth for EE, the mobile company it acquired for £12.5bn in 2015, adding 276,000 pay-monthly customers.

BT’s consumer division also did well, increasing its broadband and TV revenues by 8%. BT Openreach had a record number of new customers, with 498,000 homes and businesses signing up for faster broadband speeds in the quarter.

“There are certainly some positives to take from today’s result,” said Sam McHugh, an analyst at Exane. “However, presumably this is all factored into BT’s new guidance, so it is not clear that these results will translate into earnings upgrades, and with the accounting scandal hanging over them and reputation a little damaged, it will take some time for investors to regain some trust in BT.”

Andrea Giovanni Bono, the head of BT’s businesses in Switzerland, the Nordics, central and eastern Europe and Russia, will take responsibility for running the Italian business from 1 February.