The Investment Column: City wary of the changing face of BT

When Sir Peter Bonfield arrived at BT's headquarters earlier this year as the corporation's new chief executive, he immediately began a campaign to fight bureaucracy and remove the last traces of civil service culture. Ten months later much has changed at BT Centre and much has happened to BT, with the pounds 13bn takeover of MCI to name but one. But Sir Peter has been unable to lift BT's share price.

The MCI deal provided two convincing reasons why the underlying value of BT shares should have risen from around 350p to 400p. The first is that the company will pay a 35p-a-share special dividend next September, which should in theory give a short-term lift to the price. Secondly, the company also pledged to pay total dividends of 19.85p for this year, a rise of 6.1 per cent on last year. Another boost should have come from the more generous price formula agreed with the industry regulator, Oftel, which from next August excludes almost all business calls from price controls. It means just 20 per cent of BT's call revenues will be subject to price regulation, compared with 60 per cent today.

Yet despite all this, the shares have been disappointing, briefly surging to 385p after the announcement, only to fall back towards 360p in the days that followed. There are two reasons for this, one strategic, the other technical. Firstly, worries over regulation are being replaced by new fears over BT's international expansion. If the MCI deal goes through in a year, it will transform the company's balance sheet, adding pounds 3.5bn of debt, and transform BT from a safe utility into a growth-orientated telecoms group. Nobody, apart from management, is sure it can handle the transition.

The second concern perplexing City analysts is that after the special dividend has been paid out, the annual dividend payout will be rebased, in BT's words, by about 10 per cent. This means that the annual dividend for 1997-8, the year after the merger, will start from a 10 per cent lower base, though a likely growth rate of 6 to 7 per cent means the net reduction could be a more modest 3 per cent.

However, yesterday's second-quarter results gave investors food for thought. BT is clearly starting to successfully fight back against cable companies, with growth of 11 per cent in inland call volumes between the first and second quarters. Turnover also rose more strongly than last year, up by 4.9 per cent to pounds 3.73bn between June and September. So the picture of a declining utility searching overseas for excitement may have been overblown.

Expect static profits for the year to the end of March of pounds 3.1bn. A prospective yield of 6.7 per cent, with the shares up 9p at 369.5p, should underpin them. But growth from here may be slow. Hold.