LONDON--BT lost a fifth of its market value on Tuesday when an Italian accounting scandal compounded a sudden slowdown in its British government work, forcing the telecoms group to cut forecasts for the next two years.
In Milan, prosecutors have opened an investigation into BT's Italian unit over alleged false accounting and embezzlement, two sources with knowledge of the matter told Reuters. BT declined to comment.
In an abrupt halt to BT's gradual recovery since the 2008 downturn, the company's shares plunged to a three-and-a-half year low in their worst ever one-day fall.
While an admission of a 530-million-pound ($660 million) black hole in BT's Italian accounts shocked many, a slowdown in public sector contracts could have a longer lasting impact. The hit to cash generation could restrict the firm's firepower when bidding for the next round of expensive sports rights, at a time when it needs to agree a new payment plan to tackle its huge pension deficit and stick to its pledge to grow the dividend.
"I am deeply disappointed with the inappropriate behaviour we found," Chief Executive Gavin Patterson told analysts, after the Italian writedown ballooned from the 145 million pounds it revealed in October. "Public sector in the UK is also particularly challenging. Big contracts are completing and we're not seeing them being replaced at this stage."
Chief executive since 2013, Patterson could also lose out himself after the firm said its remuneration committee would consider the wider implications for the group. Patterson received a total of 5.4 million pounds in remuneration for the 2016 financial year, according to the group's annual report.
BT's shares, which were already down a fifth over the last 12 months, closed 21 percent lower at 303 pence, wiping 7.8 billion pounds ($9.77 billion) from its value. Richard Marwood, senior fund manager at Royal London Asset Management which owns 0.9 percent of BT's shares, said he was concerned by the magnitude of the Italian writedown, given the modest size of the business.
"Prior to this morning's news, BT investors had been concerned about BT's large pension liabilities and the company's relationship with its regulator, Ofcom. Today's news is an unwelcome addition to those worries. Certainty on any of those issues would be welcomed by investors."
According to a person familiar with the situation, BT staff in Italy colluded with suppliers and third party groups to inflate cash flow over a number of years, before a whistleblower contacted senior executives at BT headquarters in London last summer to alert them to the conduct. To mask the underlying cash performance of the business, management used third parties to pay suppliers. It employed the same tactic in reverse, accelerating the speed that clients appeared to pay their debts.
