Crisis-hit BT says Italian scandal now under control

By Paul Sandle and Kate Holton

LONDON (Reuters) - BT boss Gavin Patterson said an Italian accounting scandal that wiped 8 billion pounds ($10 billion) from the company's value this week was under control as he sought to reassure investors who he said were rightly upset with the firm.

BT stunned the market on Tuesday when it said a complex accounting scandal in Italy had blown a 530 million pound ($665 million) hole in its accounts, while demand from the British government had slowed, forcing it to cut profit targets for the next two years.

Pre-tax profit slumped 37 percent in the third quarter to 526 million pounds, dragged down by a 69 percent fall in core earnings at BT's global services division, which includes the Italian business.

While acknowledging shareholders' anger over the Italian scandal, Patterson said they should not lose sight of the fact that its core consumer business was performing well.

"Many of our shareholders are unhappy and they have a right to be. Frankly I am angry that the integrity of BT has been undermined by the wrongdoing of a few individuals in one part of the business," Patterson said.

"The situation is now under control, we have already appointed new management and as you would expect we are proactively providing assistance for the Italian authorities."

Finance Director Simon Lowth said "a handful" of executives were behind a complex set of improper accounting transactions, and a subsequent cover-up that kept London in the dark. He said internal controls had since been strengthened.

Shareholders were told of an issue in Italy in October, but Patterson said then it would not affect group forecasts.

His confidence was badly misplaced, as the cost of the scandal ballooned from 145 million pounds to 530 million.

Asked if he had a grip on the business, he said the deception was bigger and more sophisticated than the company had thought.

The head of continental Europe, Corrado Sciolla, was leaving because it happened on his watch, BT said.

Andrea Bono, currently running its Switzerland unit, would lead Italy, according to a person familiar with the situation.

Patterson could lose some of the 5.4 million pounds in pay and bonuses for last year, but when asked, he said that was a matter "for another day".

The warning on Tuesday, which said underlying revenue would not grow this year and free cash flow would be up to 700 million pounds lower than forecast, wiped out a fifth of BT's market value and all of the gains made under Patterson.

CONSUMER PROGRESS RELEGATED

The warning overshadowed positive progress in BT's consumer and networks businesses reported on Friday.

The group said it had added 83,000 broadband customers in its third quarter, while 260,000 switched to faster fibre connections.

It also said 276,000 customers signed up for monthly contracts at mobile network operator EE - with growth coming from both consumers and business - while churn, or the number of people leaving the network, was low at 1.1 percent.

Underlying revenue, adjusted for the acquisition of EE, fell 1.5 percent.

"We mustn't lose sight of the fact that BT is in good health overall," Patterson said. "We need to keep this in perspective."

Shares in the group, which had made up no ground since Tuesday's plunge, were trading 1.6 percent higher by 1240 GMT.

Analyst Polo Tang at UBS said the results provided some encouragement on EE and the networks arm Openreach, but he remained wary of further downside risk to free cash flow.

BT struck a more conciliatory note in its long-running battle with regulator Ofcom over how the company runs the national broadband network, saying an agreement could be reached.

Patterson said changes he had already made in how the unit was managed within BT could "form the basis for a fair, proportionate and sustainable settlement".

($1 = 0.7980 pounds)

(Reporting by Paul Sandle; editing by Susan Thomas and Adrian Croft)