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Investors Corner
The Market
Leading shares in London closed lower on Friday, led by Bookham
Technology, after Microsoft cut sales and earnings estimates
blaming slowing economic growth. The benchmark FTSE 100 index
fell for the second day running, dropping 80 points to 6,183.3
points. Two stock declined for every one that advanced in the
FTSE All Share index, which sank 36.84 to 2,960.24 points, while
the Techmark index shed 64.73 points to 2,628.32 points.
Companies making announcements were Scottish Power and British
Energy. Scottish Power £3.9 billion acquisition last year
of US group Pacificorp helped boost operating profits by 37
per cent to £445 million. Despite the success on the acquisition
front, analysts remained concerned about difficulties at home.
Meanwhile, British Energy continues to suffer from weak UK electricity
prices and the impact of lower output has caused station shut
downs. Analysts expect electricity prices to improve in the
short-term and growth to be achieved in British Energy’s
North American operations.
Energis
Energis, the telecoms operator, reported that profits are coming
into sight as strong demand for its advanced, broadband data
and complex hosting solutions, combined with its extended addressable
market in Continental Europe have all contributed to its performance.
In a business communications market that continues to show strong
growth, Energis is increasingly well-positioned, especially
in the higher growth, higher margin data and internet segments.
Its focus remains solidly upon the large corporates where there
is increasing recognition of the extent to which telecoms, and
particularly data and internet services, are central to their
competitive position.
In the UK, Energis’ critical mass, its network reach, its
service portfolio and its reputation for quality and service
and traffic volumes, position the group extremely well to benefit
from the changes in the market as the local loop unbundles;
as broadband fixed line, IP and mobile services converge; and
as internet hosting shifts firmly to complex solutions. Energis’
network extension programme connecting to BT’s digital
local exchanges is significantly strengthening its economics
and expanding its addressable market. This coupled with the
IP overlay network is also positioning Energis very well for
the growth of unmetered internet traffic, in which it is already
the leader.
In Continental Europe, the fact of later market deregulation
combined with plentiful availability of dark fibre gives the
group the opportunity to build substantial businesses through
marketing its existing suite of data and internet services.
These are typically in advance of those offered by the incumbents
or by other new entrants. The recent equity placing, combined
with its EBITDA growth, gives Energis the financial strength
to continue exploiting the opportunities it faces.
British Telecommunications
British Telecommunications (BT) announced the acceleration of
its transformation through a radical and unprecedented restructuring
of the business. It also announced a series of new steps which
will maximise shareholder value, while also encouraging BT management
to focus on their key customer groups. It claimed that the businesses
will be better placed to prioritise and pursue the main opportunities
for growth which will be in wireless, broadband and IP, and
within western Europe and Japan.
BT also announced that it is going to create a new network company,
NetCo, which will be both structurally and managerially separate.
The move is pro-competitive and removes any perceived conflicts
between NetCo and the rest of BT. The new NetCo will be able
to focus solely on meeting the needs of the other licensed operators
and service providers including BT Retail and BT Ignite, and
they will all benefit from being served by a company that has
a clear, separate and exclusive emphasis on their distinctive
needs.
It is convinced that the continued expansion in demand for voice,
data and Internet products means that the new NetCo will have
significant opportunities for growth and a great future. Once
the precise shape of the new NetCo has been defined, and the
structural separation completed following discussions with the
Government and Oftel, the group intends to seek a separate listing
for up to 25 per cent of NetCo.
Furthermore the group’s chairman also announced that it
will list up to 25 per cent of BT Wireless operation in the
second half of next year, and up to 25 per cent of Yell before
the end of this financial year. By the end of 2001 it will have
developed BT Ignite into a position from which it too could
be listed. The creation of NetCo (a fully separate company)
should reduce the need for those aspects of regulation, which
derive from its current vertically, integrated structure.
BT is also going to create a new holding company. This will
make the group more agile and make it easier to facilitate acquisitions,
joint ventures and listings, where they are in the interests
of the business, its customers and shareholders. This action
will reshape the UK telecoms market and will allow it to operate
as a completely different kind of company. Although they are
operationally separate, BT Retail, BTopenworld, BT Wireless,
BT Ignite, and Yell will work together to create complete solutions
for their customers in the wireless, Internet, broadband and
e-commerce areas.
This new holding company, together with the structural separation
of NetCo, will provide further productivity improvements. The
company has already exceeded BT’s target of 3,000 for the
reduction of management and more than 5,000 people will have
left the business by the end of this year.
BT is now tightening its primary in-country geographic focus
to within western Europe and Japan which is where it has been
concentrating its investment activity. BT’s primary route
to providing global communications will be via Concert, its
50/50 joint venture with AT&T. And it has been discussing
with AT&T ways to broaden and strengthen what is already
one of the most successful global networks.
One result of the tighter geographic focus is that it shall
be able to realise value from some of its assets. Discussions
are already proceeding with some of its partners and the Group
remains confident that the disposals programme should generate
around £5 billion cash. Taken together with the planned
partial listings of BT Wireless and Yell, BT is expected to
reduce its debt by at least £10 billion by December 2001.
Concert’s total turnover, including BT’s proportionate
share of its ventures, has however, increased by around £550
million in the six months as a result of the establishment of
Concert, reflecting the greater level of AT&T’s business
introduced into the global venture. The transfer will have adversely
affected group operating profit and group EBITDA by approximately
£90 million and £130 million in the six months,
respectively.
BT’s significant price reductions on national calls introduced
in October 1999 and enhanced call allowances included in residential
customers’ line rentals has had an adverse effect on call
turnover. Business line connections grew by 5.5 per cent over
the year to 30 September 2000 while residential lines continued
to show a small decline in numbers.
Overall, BT’s system size grew by 1.8 per cent in the 12
months. Mobile communications turnover rose by 21 per cent to
£1,265 million. The increase was mainly due to the growth
in outgoing calls made by BT Cellnet’s customers and the
acquisition of Esat Digifone in March 2000.
BT’s gearing on 30 September 2000 stood at 113 per cent
with net debt of £18,739 million compared with £8,700
million on 31 March 2000. Viag Interkom, the UMTS network is
due to become operational in 2002. It shall be funding a second
45 per cent share when it acquires control of Viag Interkom
in 2001.
BT Retail is benefiting from growing internet and fixed to mobile
non-geographic call volumes. BT’s Surftime internet products
launched on 1 June 2000 are proving to be popular with average
durations more than double pay as you go calls. The demand for
second residential lines remains strong. Subject to regulatory
approval, BT Retail will be offering new call packages to its
20 million residential customers from 1 December 2000. These
“BT Together” call packages include those providing
customers with unlimited local evening and weekend phone calls
of up to one hour in length per call or unlimited evening and
weekend internet calls for a fee inclusive of the line rental.
Thus
Thus, the telecom group, reported that service development focused
on enhancing Demon’s Internet access and hosting services
to help retain dial up customers and enhance business sales,
rebalancing revenues away from dial up termination payments.
Demon Premier Connect was launched in October, providing customers
with better value dial up rates and unmetered Internet access.
Since launch, over 3,300 customers have moved to this package.
At the end of September the Company also began sales of its
ADSL services, Demon Express following extensive customer trials.
To date, over 1,200 customer orders have been received of which
650 have been connected. In addition, Demon Now was introduced
giving customers the opportunity to access their Demon account
via a WAP service. The service has attracted over 3,000 users
to date. New hosting services introduced by the company included
the launch of an entry level, dedicated server product, a hosted
web site set up and e-commerce application and expansion of
the Company’s video streaming capabilities.
Thus’ expansion of the national network continued to make
good progress, with operational fibre up 75 per cent to 6,750kms
since the beginning of the roll-out this time last year. During
the first half, service was launched in Reading, Swindon, Leeds
and Middlesbrough, with effort currently being directed towards
completion of the Southern ring and the achievement of countrywide
connectivity. The Company’s web hosting capability was
extended by some 25,000 square feet, with the launch of a new
facility at Park Royal in West London, adding to the existing
10,000 square feet of hosting space in London.
The Company also upgraded its capacity into the London Internet
Exchange, increased its transatlantic capacity and built out
points of presence to an additional three key Internet exchange
points in the US at Washington, Chicago and San Jose. These
new Internet exchange points provide East to West US connectivity
and will enable Thus to enhance its peering and improve Internet
service quality.
In view of progress made in the second quarter, the board remains
confident that revenue growth will improve in the second half
of the year, although full year growth will remain materially
below the 31 per cent growth attained in the previous year.
As indicated in the first quarter statement, the board continues
to believe that due to the lower annual growth rate, the cost
of investing in future expansion and competitive pressure, EBITDA
for the full year will be negative.
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