BT Plunges After Cutting Outlook

BT Group delivered a one-two blow to investors by disclosing deeper accounting errors at its Italian unit and cutting its outlook as the impact of Brexit works its way through government budgets, according to Bloomberg.

The stock dropped as much as 21 percent, the most since 1986. The U.K. telecommunications company said a probe found more faulty accounting and “inappropriate behavior“ in Italy than the company first identified in October, forcing BT to triple the amount of a writedown to 530 million pounds. “We are deeply disappointed with the inappropriate behavior we found,“ in the Italian business, CEO Gavin Patterson said on a conference call. “The extent and complexity of inappropriate behavior was far greater than previously identified.“

Patterson, in his fourth year as CEO, finds himself facing an expanding set of challenges, from the scandal unfolding in Italy to Brexit, rising competition in key businesses, a ballooning pension deficit and an escalating battle with regulator Ofcom. While consumers are holding up well, the U.K.’s decision to leave the European Union is stoking inflation and squeezing the budgets of BT’s clients, causing some of them to end contracts early, the company said.

The accounting issue in Italy is the biggest contributor to the lower earnings outlook this year, while the weaker U.K. and international businesses are more to blame for the reduced forecast for next, executives said on the call. They said BT is now unwinding improper loans taken out by the Italian managers which were used to pay suppliers. The loans used BT Italia’s accounts receivable as collateral, in a process known as factoring. There were also improper transactions involving the measurement of revenues, operating expenditures and capital expenditures, as well as sale-and-leaseback deals, they said.

BT now expects revenue for the fiscal year ending in March to be flat, after forecasting growth as recently as October. For the coming year, BT reduced its target for normalized free cash flow by as much as 17 percent, to a range of 3 billion pounds to 3.2 billion pounds, from a target of more than 3.6 billion pounds issued in October. The company will report results on Friday that will show that consumer and other parts of the business are strong, Patterson said. “It is a mixed bag of results that we’ll talk to you about later in the week.“