The market is in shock after telecoms giant BT (BT.A) admitted the cost of dodgy accounting at its Italian business is far bigger than first thought (24 Jan).

The group’s own investigation has uncovered an accounting malpractice bill of around £530m, more than three-and-a-half times the £145m initially forecast.

This huge write-down, plus slowing public sector and international work, means a substantial hit to revenues, profits and cash flow this year to 31 March 2017, which will spill over into the next financial year too.

This year’s earnings before interest, tax, depreciation and amortisation (EBITDA) will come in around £300m lower than expected, at about £7.6bn, with roughly £175m due to the Italy fiasco. It gets worse, with an estimated £600m to £700m hit to previously anticipated free cash flow of £3.2bn, and a rough £500m hit next year.

While the Italian operations are relatively small, accounting scandals go down particularly badly with investors. The share price collapsed by nearly 18% in trading on 24 January, plunging to 314.95p, its lowest point since May 2013.

That implies that nearly £7bn has been swiped off the market cap at a stroke, as shareholders also sweat over the impact on BT’s bonds and £14.2bn pension deficit. BT has at least confirmed that it still expects to grow dividend per share by 10% both this year and next.

Some analysts speculate that the bleaky-worded warning has an ulterior motive designed to show BT’s weakest possible hand as it continues negotiations with watchdog Ofcom over the future of its Openreach infrastructure network. (SF)

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