BT agrees new deal on 4 billion stg pension fund deficit

Stock Market Predictions

LONDON (Global Markets) - British telecoms group BT (BT.L) has reached a deal to pay down the 4.1 billion-pound ($6.5 billion) deficit on its staff pension fund more quickly than previously planned, it announced on Friday, resolving a long-running concern for investors and clearing the way for potentially higher dividends in future.

Shares in the former state telecoms monopoly leapt to a four-year high after it said it has agreed with the BT Pension Scheme's trustee that it would start clearing the deficit immediately with a top-up payment of 2 billion pounds by the end of this month.

The group, which had previously relied on cost cuts and improved efficiency to drive cash generation, said it would then be able to make lower annual contributions for the next nine years of 325 million pounds, compared with its previous goal of clearing the deficit over 17 years.

Analysts said the new deficit estimate was also less than expected.

"This is a very rational thing to do and helps to materially de-risk the company and give more dividend flexibility in the future," Macquarie analyst Guy Peddy told Global Markets.

BT, which has been dogged in recent years by the pension deficit and the restrictions it placed on its dividend, said a new triennial valuation at the end of June put the deficit at less than half the size of the 9 billion pound shortfall when the scheme was evaluated in 2008.

"This agreement under which the company makes an immediate contribution to the scheme of almost half of the deficit reflects BT's financial strength," Chief Executive Ian Livingston said.

"BT's long-term sustainable cash generation has improved significantly since the 2008 valuation and we remain focused on improving BT's financial strength, investing in our future and enhancing shareholder returns."

LUMP SUM

The new deficit settlement compared with a previous payment plan which ran over 17 years and started off with an annual payment of 525 million pounds which would then rise to 856 million pounds in 2025.

"Our sum-of-parts valuation for BT had assumed a net-of-tax pension deficit of around 5.1 billion pounds," Oriel Securities said. "This will now have to fall. The difference is around a 25 pence per share boost to our estimate of BT's fair value."

Analysts also noted a condition that BT would have to pay more money into the scheme if its shareholder returns between March 2012 and June 2015 exceeded the pension deficit payments.

With shareholder returns for that period forecast at around 2.5 billion pounds, and the deficit payments planned at 2.98 billion pounds, analysts noted that there was plenty of headroom for BT to raise the dividend.

BT shares were up 5.8 percent at 233 pence by 1245 GMT, having earlier scaled to a four-year high of 235.3 pence, the day's biggest rise by a European blue-chip stock .FTEU3.

"With regard to dividends, the company remains circumspect with regard to a potential raise but acknowledged that resolution of a new top-up plan was a pre-condition to addressing potentially increased shareholder remuneration," Deutsche Bank said.

($1 = 0.6326 British pounds)

(Editing by Mark Potter and Greg Mahlich)