People are talking about a BT Global Services sell-off again

Well, outsourcing division sale would raise much-needed capital

Analysis BT Global Services remains the problem child for the former state monopoly and something has got to give: sales generated by the division continue to go in the wrong direction (in part due to the decline in global outsourcing), bucking the upward swing across the wider group.

And while historic talk in the industry that BTGS would be sold off proved to be wide of the mark, multiple sources have told The Register that BT may well be looking to offload the business in-the-not-too-distant future.

Everything about BT’s strategy since chief exec Gavin Patterson joined in 2013 has centred on growing the consumer business and the UK network market, making the managed services and outsourcing arm the odd one out.

While the huge fine related to BT's Ethernet overcharging, and the write-down of £530m due to Global Services’ Italian accounting scandal, have put the business further in the spotlight. That incident knocked off £8bn ($10.3bn) of its share price, which has yet to recover.

The future of BTGS is already under review, with chief exec Gavin Patterson saying as much in the last set of quarterly numbers:

"[We]'re prepared to look at a range of different options, so it's very much on our agenda."

Further indication of near-term intent might even come as soon as tomorrow, when the firm releases its annual results.

One contact, who asked not to be named, said BT is looking to raise capital by selling Global Services. "I heard they wanted to wait until [the] Italy [issue] was further behind them, but they definitely face a capital crunch next year," he said.

Another sources close to BT told us the French and Italian arms of Global Services business are in line to be sold off first.

BT, of course, declined to comment on rumour and speculation.

Hand in pocket

In addition to woes on the continent, BT was recently hit with record penalties over delays in fixing rivals' leased Ethernet lines. It promised to pay £300m ($388m) to competitors, in addition to a £42m ($54m) fine to Ofcom. Separate to that, it may have to pay an additional £22m ($28m) in interest related to Ethernet overcharging.

On top of that, the business:

• Is expected to come up with a payment plan for its ballooning £9bn-£14bn ($11.6bn-$18bn) pensions deficit this summer. • Faces £550m ($711.5m) in integration costs associated with its £12.5bn ($16.2bn) acquisition of EE. • Recently splashed £1.2bn ($1.5bn), outbidding Sky in securing Champions League rights and further payments on its dividend policy.

The contact added:

"The other issue they face is that take-up of superfast [broadband] is hitting cabinet capacity limits (if you remember FTTC was built to a 40 per cent take-up), so Openreach has a huge unbudgeted upgrade capital requirement.

"This will drive announcements on FTTP investment, which they can present as responding to regulatory/government desires. The need for capital to support this means they will need an asset sale or a change to dividend policy. So selling Global seems like the obvious solution."

Reform and refocus

Matthew Howett, independent telecoms analyst, believes that a sale of Global Services could help the business to reform and refocus. "Investors are getting very irate," he said.

Of all the possible buyers, he believes a sale to Deutsche Telekom could make the most sense. "It already has a large managed service business, so this is a familiar market to them. And Deutsche Telekom is close to BT via EE, which it owned a 50 per cent stake in. So there is an existing close relationship between the companies."

But Kester Mann, analyst at CCS Insight, believes there may be life yet in Global Services. "There is a lot of money to be made on the enterprise side. Keeping hold of Global Services gives BT exposure to markets outside UK, which could be useful."

The past year has been a turbulent one for BT. Undoubtedly the company's main priority must now be to regain investor confidence and inject some life into its share price.

To that end, Windsor Holden, analyst at Juniper Research, believes the company will seek to update the market about Global Services at the nearest opportunity.

"I'd imagine we'll get a steer of some sort this week. The problem [is, with] so many rumours flying around, that is bound to depress the share price. So it needs to be as upfront as possible in order to maintain confidence, while it can't put all its cards on the table while there [are] delicate negotiations in place."

One thing is for certain: the grilling of Patterson on Thursday will make for interesting listening, irrespective of Global Services' fate. ®

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