International Finance: The BT Group - Case Study Example

Lecturer International Finance Introduction The BT Group entails a British Multinational company which provides telecommunicationsproducts and services. The headquarters of the company is located in London, the United Kingdom. The company operates in approximately 170 countries. The BT Global Services branch provides telecoms services to the governmental and corporate clients internationally. The BT Consumer branch provides three key services within Great Britain to approximately 18 million customers. The three services are; telephony, subscription television, and broadband services. The academic paper aims at illustrating the financial analysis of the company, over the last five years (Meyer 2007). Five Tactical Areas The company must adequately analyze five significant areas, so as to effectively survive the international or local financial crisis. The five tactical areas are; maximizing the present cash position, reducing the operational risks, conducting effective scenario planning, reviewing the business performance, and finally maintaining confidence level of major shareholders. BT Group has a strong financial performance, that will enable it survive the financial crisis. The last five years have illustrated increasing net profit trends on 31 March 2009. The company posted a loss of 81 million pounds. This was followed by a profit, in 31 March 2010, of 1,029 million pounds. On 31 March 2011, the profits rose to 1,504 million ponds. 2012, illustrated better financial performance of 2,003 million pounds. The net profit continued to improve, as the 2013 level was 2,091 million pounds (Richard 2008). The company has put in place adequate measures of reducing the operational risks. The company continuously strives to enhance the customer experience level. This is through adhering to promises, being easily accessible, continuously updating the customers, putting in place appropriate actions to address customer complaints, and being ‘right first time’. These measures minimize operational risks because they create a high level of customer loyalty. Loyal customers will seek services and products of the company, even during financial challenges. Effective scenario planning entails the effects of the financial crisis on the organization. this is achieved through careful analysis of the challenges and opportunities of the company. The main challenge during financial crisis involves liquidity. The company can solve this challenge through effectively engaging reliable suppliers, who will continuously provide resources during the crisis period. The main opportunity for the company entails huge potential in emerging economies of Africa and Asia. The company can tap into the emerging markets to address the crisis being experienced in the developed world (Linge 2013). The company must ensure confidence of stakeholders during the financial crisis duration. The customers should be aware that the crisis will not negatively affect quality of products and services, and delivery reliability. The production technology in place is adequate to ensure high quality production for one decade. The management should also ensure the trust of shareholders and creditors. Due to the favorable performance of the company over the last five years, achieving stakeholder trust is very easy. The performance of the business should be adequately reviewed to show adequate abilities of overcoming the economic crisis (David 2007). The profitability of the company has continuously risen over the last five years. This explains that the business has enough financial capital that will be applied in countering the negative economic effects of the financial crisis. The strong business performance is a critical factor required to maintain the confidence of the key stakeholders like suppliers, financiers, customers and industry regulators. Critical Assessment of Dividends, Capital structure, and Shareholder Wealth The BT Group lists ordinary shares primarily in the London Stock Exchange, through the symbol BT.A. Trading also takes place in the New York stock Exchange, through the BT symbol. The American depositary Shares (ADSs) illustrates each 10 ordinary shares. These ordinary shares are issued through the JPMorgan Chase Bank, which is the Depositary of the American depositary Receipts (ADRs) that are shown in the New York stock Exchange. ADS trades, but it is not listed or illustrated in the London Stock Exchange. Variations in the currency rates between the US Dollar and the Sterling Pound, influences the US Dollar rates compared to the Sterling value of the ordinary shares of the BT Group in the London Stock Exchange. Hence, they are likely to influence the market value of the ADS s under the New York Stock Exchange. The June 2001 Rights Issue and also the demerger during November 2001, reviewed the value, for reasons of Capital Gains Tax (CGT), of the BT Group shares. the official opening value of BT Group and the 02 shares as at 19 November 2001 after the demerger are shown as; 285.75p and 82.75 p respectively. This implies a combined rate of 368.50p (77.544%) is a result of the company and also 22.456% to O2. For the purposes of CGT estimations, the base value is calculated through multiplying acquisition value of O2 and BT Group shareholding by 22.456% and 77.544% respectively. The major shareholders of the company do not possess different voting rights from the other shareholders. On 6 May 2011, 8,151,227,029 ordinary shares outstanding existed; these comprised 388,070,539 shares inform of treasury shares (Rory 2008). On the same date, an estimated 15.3 million ADS were outstanding. They were possessed through 2,082 ADRs record owners. The ADSs are equal to approximately 153 million ordinary shares, and around 1.8% of the entire value of the ordinary shares that are due on that specific date. On 31 March 2011, 3,686 shareholders had the United States addresses on the shareholder register. This represented approximately 0.03% in the ordinary shares of the BT Group. The dividends payable to the BT shares and ADS over five year period are illustrated in table below. Through the dividends investment plans, cash from the dividends of participants can be utilized in purchasing more BT shares in the stock market. Financial year Per ordinary share Per ADS Per ADS Ended 31 March Interim pence Final pence Total pence Interim pounds Final pounds Total pounds Interim US$ Final US$ Total US$ 2009 5.10 10.00 15.10 0.540 1.000 1.510 0.991 1.972 2.963 2010 5.40 10.40 15.80 0.540 1.040 1.580 1.030 1.833 2.863 2011 5.40 1.10 6.50 0.540 0.110 0.650 0.765 0.161 0.926 2012 2.30 4.60 6.90 0.230 0.460 0.690 0.339 0.684 1.023 2013 2.40 5.00 7.40 0.240 0.500 0.740 0.366 Effects of the Capital Market and Credit Crunch on BT Group The cost of capital estimation illustrates the 2013/2014 financial period of BT Group. The real risk free rate projected for the period shows the most appropriate starting point for the analysis. Present market data show that the market projects real risk free rate as 1.23% during the five year borrowing period, as from September 2013. This is significantly higher than the present rates on the Index Linked Gilts (ILGs). The future yields implied are generally relatively volatile. The market information over three months illustrate that implied projected yields on the five and also ten year 2013/2014 ILGs varied between 1.2 and 1.6%.this explanation illustrates that the Ofcom assumption of 1.5% real risk free rate generates minimal significance in this parameter. To monitor forecasting uncertainty of the risk free rate, and also minimize the risks of undervaluation that can occur in the price control duration, the regulators have allowed headroom through assuming the risk free rate greater than the values illustrated through the market rates. Using conservative headroom for the projected risk free rate illustrated through market data, shows that effective estimation of the 2013/2014 rates will be between 1.5% and 2%. Apart from the high actual inflation, explanation by 2013/2014 RPI inflation forecasts and also the implied future RPI levels of inflation shown by the five year gilts or the swaps contracts, illustrates that 2.5% inflation level assumption by Ofcom is generally very low for the 2013/2014. An estimate which is more acceptable will be between 2.5 and 3%. Generally, this implies the normal risk free level will be between 4 and 5%, and the point estimate level of 4.5% that is greater than the 4% assumption by Ofcom. There are generally a lot of uncertainties within the capital markets. The effect of the financial crisis that occurred recently, on the expected equity returns is still unclear. Thus, there is a lot of uncertainty level in regards to future projected Equity Risk Premium (ERP). According to the evidence on historical market returns, forecasted estimates, and analysis by the industry experts, and effective ERP assumption for analyzing the 2013/2014 capital cost is between 4.5 and 5.5 %, and point estimate. This adheres to the ERP estimates illustrated in the consultation document of Ofcom. The BT Group illustrates economic cyclicality due to its ability of overcoming credit crunches. Company earnings usually reduce during credit crunch. However, the increasing demands of internet and related communication services generally drive earnings up and above the previous earnings. This is the reason why BT Group has shown satisfactory growth in earning over the previous five years. This increased the share price from the initial nadir, to approximately 80p in 2009, and presently 382p (Simon 2013). Acquisition Appraisal Acquisition of a company like BT Group is effectively determined through the investment appraisal tools. This paper utilizes the three major appraisal techniques; Net Present Value (NPV), Internet Rate or Return (IRR), and bay back. All the three investment tools apply cash flows as the key determinant of the valued of the acquisition project, BT Group. Cash is the key financial driver, and hence, the main factor that enhances business success. The NPV is determined through reducing future money value, to the present value of by applying the discount rate. The discount rate converts the future cash flows into the current value. This methodology requires the BT Group cash flow allocated over appropriate time duration. The total summation of the discounted cash flows applied NVP as an investment option. The discount rate integrates two main factors; risk and the time currency value. Risks and the discount rates are directly proportional. Acquisition of BT Group is a financially viable investment, because of predicted favorable currency values, and also high levels of projected sales value (Richard 2008). The Internal Rate or Return (IRR) is applied in the estimation of the discount level needed to provide the acquisition project an NPV of NIL. This approach also needs the cash flows emanating from a project to be calculated accurately over time durations. However, it is not necessary to illustrate the discount rate, because this is the methodology output. The main challenge with IRR is that it does not illustrate risks. The BT Group operates in a very risky financial market, due to the continuous fluctuations in the financial value and also market values. The IRR also required minimal time duration of the project, usually a year. Thus the outcomes of the acquisition methodology are very challenging for the projects with longer implementation duration. Thus it cannot be effectively applied during the evaluation of BT Group acquisition project, due to the long term durations (years) required. The IRR can be favorably applied as a secondary tool, to support other effective investment tools in the areas f BT Group acquisition (Rory 2008). The pay back approach is suitable for small scale projects that require minimal implementation expenses and a reliable revenue stream. It analyses the time duration needed by the revenue sources to repay the expenses related to the acquisition implementation. Pay back duration is more effective over short durations, for the project involving acquisition investment. The payback does not effectively handle projects with high financial risks like acquisition. Thus the most appropriate investment tool for the acquisition of BT Group is the Net Present Value (Linge 2007). Conclusion The BT Group has embraced the acquisition strategy in business operations. Presently, the company has agreed to the definitive terms for acquisition of EE, at an estimated financial value of 12.5 billion pounds. The integration of EE and BT aims at providing customers with superior, innovative, seamless and effective services. The services integrate the capabilities of; advanced mobile, Wi-Fi and broadband capabilities. The integration will also enhance mobility strategy and strategy, required for future investments or also innovation, as the company continuously strives to develop world class infrastructure in the digital sector. Bibliography Cellan-Jones, Rory. (17 March 2008). Acquisition Strategies. London: SAGE Publications. Linge, Nigel. (4 February 2013). "BT Analysis". Manchester Evening News (MEN Media). Meyer, David. (3 October 2007). "BT buys Lynx Technology". European Technologies. Simon, Goodley. ( 2013). "BT in talks with Telefónica to buy O2". The Guardian. Wray, Richard. (10 July 2008). "BT buys into social networking directories with £20m for Ufindus". The Guardian. Read More