Telecoms giant forced to pay Deutsche Telekom and Orange to settle claim relating to the sale of EE

This article is more than 3 years old

This article is more than 3 years old

BT’s profits fell more than 40% in the first quarter of its new financial year after it was forced to pay out £225m to two shareholders following the accounting scandal at its Italian operation.

Deutsche Telekom and Orange became shareholders in BT after the company struck a £12.5bn cash and shares deal to buy mobile company EE in 2015.



As part of that deal the two companies were issued a warranty as a protection against a slump in BT’s performance.

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BT’s stock market value dropped by almost £8bn in January after the company revealed the full extent of a £530m accounting scandal at its Italian operation. BT’s share price remains more than 20% lower than it was a year ago.

BT said the £225m payout represented a “full and final settlement in respect of these issues”.

The company’s share price fell by more than 4% in early trading on Friday as investors digested the latest bad news to hit the company.

Gavin Patterson, the BT chief executive, said DT and Orange “only very recently” raised the issue of a payment ahead of a deadline to make a claim at the end of the day on Friday.

He said the settlement was better than facing a longer legal process that would have been triggered if an official claim was lodged.



He added that there were still a “small number” of class action suits related to the accounting scandal lodged by investors in the US.

“We think we have a strong case to defend but I can’t comment on those,” he said.

The ongoing fallout of the Italian accounting scandal has resulted in Patterson’s pay for last year being slashed by £4m, and prompted a restructure with the axing of 4,000 jobs, about half in the UK.



The charge hurt BT’s financial performance badly, with pre-tax profits slumping 42% from £717m to £418m in the three months to the end of June.

Stripping out the impact of the one-off £225m payment, BT’s adjusted profits still fell by 2% to £1.78bn in its first quarter.

The company attributed this to increased pension costs, programme rights and investing in bringing all of its call centre operations back to the UK.



In March, BT paid £1.18bn for Champions League football rights, 32% more than the previous deal, to fend off Sky. The rising cost of sports rights has also affected Sky, which on Thursday said a one-off £629m step-up in Premier League rights costs drove a 14% drop in profits at its UK and Ireland operation.



“The days of rampant [rights cost] inflation I think are behind us,” said Patterson. “I think we are getting to a point where rights fees will increasingly be challenged in terms of inflation. We are prepared to walk away if the price is too high.”

Upcoming sports rights auctions include the Football League, which is expected to be a high-stakes bidding war with Sky, and ATP World Tour Tennis.

BT added just 8,000 new TV customers, following an equally anaemic 11,000 in the first quarter of the year – close to a record low.

Patterson said overall BT delivered an “encouraging performance” in its first quarter, with total revenues up 1% to £5.8bn. BT pointed to a healthy 9% increase in broadband and TV revenue, fuelled by price rises, and a 4% rise at EE to £1.3bn.

The company also announced a further restructure that will see its BT Consumer division, home to its TV service and broadband operation, merged with mobile business EE.

As a result the BT Consumer chief executive John Petter, a 13-year BT veteran, is to leave the company. Marc Allera, the chief executive of EE, will take control of the enlarged division.

Patterson indicated that the merger was likely to lead to job cuts beyond what the company announced in May.