Competition hits BT

British Telecom has posted a fall in profits as it continues to be hit by growing competition and the cost of launching new products.

The 5% fall in underlying profits came despite a surge in internet and mobile calls increasing its turnover by 20% in the year to 31 March.

Its pre-tax profits for the year were down by nearly a third to £2.94bn, from £4.29bn a year earlier when profits were boosted by a one-off gain from the sale of the group's stake in MCI Communications.

The figures were slightly better than expected by analysts, who were already prepared for a drop-off in BT's profits.

Chairman Iain Vallance said the result was a good achievement "against a background of considerable change".

The company said the pre-tax profits fall was also due to higher interest payments after it bought up the half of BT Cellnet it did not already own last year, and price cuts across its business.

Massive mobile growth

BT saw massive growth in its mobile business where turnover grew by 55%.

BT Cellnet's customer base grew by two thirds to 7.4 million.

But its fixed line business saw turnover fall as a result of price cuts, which the company said totalled £500m over the year.

Prices are falling, competitors are introducing all sorts of products and we've got to fight back

Sir Peter Bonfield, BT's chief executive

Most of the cuts came from the 25% reduction in charges for calling a mobile phone from a fixed line.

The cuts were introduced in April 1999 after a Competition Commission inquiry into the charges.

The company said it would pay a final dividend of 21.9p, up on last year's 20.4p.

The former UK monopoly has come under considerable pressure to lower its prices from regulators and from lower-priced competitors coming onto the UK market.

But the company is looking to broadband products such as mobile phones with internet access to offset the erosion of its traditional fixed-line business.

Finance director Robert Brace said developing new products and increasing investment would continue to put a strain on the company's earnings.

And investors remain unsure of BT's strategy, with the stock sliding 5% to 943p following the results.

"There's no doubt the UK side will get hard hit," said Paul Mount, analyst at Nomura. "What they've got to persuade people is that they've got some potential to grow the other businesses. At the moment it's not really clear to me that they have any particular advantages."

Acquisition rumours

Analysts say that BT needs to make an acquisition to consolidate its position on the European market, and there has been talk that the company is interested in Spanish operator, Telefonica, after its merger talks with the Netherlands' KPN broke down recently.

At the moment it's not really clear to me that they have any particular advantages

Paul Mount, Nomura analyst

Speculation that an acquisition might be in the offing grew on Wednesday after it emerged that BT had tapped the capital markets for a £16bn loan.

But BT chief executive Sir Peter Bonfield said that part of the money would be used to finance the £4.03bn fee for a third generation mobile licence that BT won in April.

He said the remaining cash would be used to increase its holdings in European telephone and mobile operators and to take part in other mobile phone licence auctions throughout Europe.

"It's a prudent way of making sure that we have resources available," he said.

BT hopes to increase its 26% stake in French mobile operator Cegetel to 30% by buying shares that Vodafone Airtouch is planning to sell.