Jan du Plessis is moving from one tough job to another, as the departing chairman of Rio Tinto Group takes up the same post at troubled telecommunications carrier BT Group on Wednesday.
At the world’s second largest mining company, Du Plessis has been contending with the fraud investigations of two former CEOs. He steps down in early 2018 after nine years, having steered Rio Tinto to recovery from an industry slump that halved its share price in less than a year.
The 63-year-old South African has a lot to do at BT, where he replaces Mike Rake, who was chairman for 10 years. Shares of Britain’s former phone monopoly are at the lowest since early 2013 as investors fret about changes in the marketplace and whether BT will generate enough cash to satisfy regulators, pension trustees and investors relying on its dividend growth pledge.
Among the priorities: delivering on promised reforms at the Openreach network division, avoiding a big increase in cash contributions to fill a gaping pension deficit and sorting out whether CEO Gavin Patterson should continue leading BT through transitions at Openreach and its consumer and global services units.
Openreach, BT’s biggest source of earnings before interest, taxes, depreciation and amortisation with a margin above 50%, has provided its share of headaches, too. UK regulators forced BT to legally separate the unit in March. They’re also demanding better service and more investment in fibre to boost Internet speeds delivered by BT and rivals that use its network.
Openreach is seeking co-investments in fibre broadband, but has yet to announce any deals. Talks with its customers could quickly get bogged down in disagreements over connection fees, where to build and regulatory side discussions to share costs for the fibre build and a rural broadband push with BT’s rivals.
Shareholders also worry that the cash commitment required to boost spending on fibre could force the BT board to cut a dividend that’s grown reliably for years. The yield of about 5.9% is elevated relative to peers, highlighting those fears.
Structural spin-off
A failure to fix communications regulator Ofcom’s problems with Openreach could mean saying goodbye to the cash cow itself, given the regulator has said it could force a full structural spin-off. If a solution proves too difficult, Du Plessis could take a radical approach, breaking with his predecessor to pursue such a breakup.
“BT’s incoming chairman faces the clear priority of repairing relations with Ofcom,” Jerry Dellis, an analyst at Jefferies in London, wrote in a 25 October research note. “This will require a very visible demonstration of network investment ranking above shareholders. We believe that a dividend cut cannot be ruled out.”
Another massive strain on BT’s cash is its pension, the subject of a current review by trustees. The actuarial deficit, which soared to a record £13.9bn in June 2016, is expected to rise further and BT may be forced to pay 42% more in cash contributions over the next three years, according to Moody’s Investors Service estimates.
Du Plessis will surely be involved in BT’s efforts to avoid the higher cash payments, including its proposal to end new accruals for employees still in a defined benefit programme and the possible setup of an asset-backed contribution agreement to satisfy trustees in the case of a default.
The biggest question facing Du Plessis may be whether Patterson, after four years as CEO, has the ability to turn BT around. Patterson survived a profit warning in January over a slowdown in the company’s IT services units and an accounting scandal in Italy.
A BT spokesman said Du Plessis isn’t giving interviews. He takes over as BT prepares to release fiscal 2018 second quarter results on Thursday.
An average of analysts’ estimates compiled by BT shows an expectation for the carrier to report Ebitda of £1.8bn, down from £1.9bn a year earlier. Revenue is expected to be slightly down at about £6bn.
A financial results release without any negative surprises would be a first for BT in a year, which would no doubt be welcomed by Du Plessis in the first days of his new assignment. — Reported by Rebecca Penty, (c) 2017 Bloomberg LP
