BT (LSE: BT-A) (NYSE: BT.US) has been one of the FTSE 100‘s best performers over the past five years. Indeed, the company’s shares have jumped around 190% since the beginning of 2010, excluding dividends.
This performance has not been accidental. The company has aggressively chased growth opportunities, including diversification into the pay-tv business and, as announced recently, BT is re-entering the mobile market with the acquisition of mobile giant EE.
However, over the past few years, while BT’s income has grown, so has the company’s debt pile and pension deficit and this is what concerns me.
Rising levels of debt
BT has never had a squeaky clean balance sheet. The company, due to the nature of its business, spends heavily on telecommunications infrastructure, which isn’t cheap. As a result, BT has only reported positive shareholder equity — assets minus liabilities — in only two out of the past five years as liabilities have exceeded assets.
For example, according to the company’s most recent financial statement, at the end of September BT had just under £10bn in debt, £1.8bn of cash and shareholder equity of negative £365m.
What’s more, a large part of the company’s debt is related to its pension fund and paying this off is costing the company a lot of money.
Specifically, according to BT’s 2014 annual report before specific items, the group made a profit of £2.2bn. But after restructuring charges and pension liability repayments, the group made a loss of £196m.
Furthermore, even after hefty contributions over the past few years, at the end of March last year BT’s pension deficit stood at around £1.7bn. And this figure could be about to change significantly, as the company will soon publish the results of a nine-month long review of its £47bn pension plan. The last time such a review was conducted was three years ago.
Unfortunately, the most bearish analysts believe that the results of the review will show that the company’s pension deficit will have exploded to £8.1bn, indicating that BT would need to make “top-up” payments of £700 every year, above existing payments of about £325m.
Cash crunch
So it seems as if BT’s pension deficit is coming back to haunt the company and this could push the group into a corner. Indeed, BT can hardly afford higher top-up payments right now as the group needs funds to fight off Sky and fund the acquisition of EE.
In particular, BT needs to find around £6.3bn in cash to fund the acquisition of EE, while the battle with Sky, for the rights to televise the Premier League, could cost BT billions. It really is crunch time for BT and with a weak balance sheet as well as the prospect of higher pension contributions, the company does not have much financial flexibility.