£6.5bn of market cap goes up in smoke

BT previously announced on 27 October 2016 that an initial internal investigation of accounting practices in its Italian business had identified certain historical accounting errors and areas of management judgement requiring reassessment. At that time, they announced the write-down of items on the balance sheet by £145m, being the then best estimate of the financial impact of these issues. Since then, BT has progressed with the investigation, which has included an independent review by KPMG of the accounting practices in the Italian operations. These investigations have revealed that the extent and complexity of inappropriate behaviour at the Italian business were far greater than previously identified and have revealed improper accounting practices and a complex set of improper sales, purchase, factoring and leasing transactions. These activities have resulted in the overstatement of earnings in the Italian business over a number of years. The investigation into the financial position of the Italian business is now substantially complete. The adjustments identified have increased from the £145m to a total of around £530m. In addition, BT would expect these matters to result in a reduction in the Q3 revenue and EBITDA of around £120m, and in a reduction in Q3 normalised free cash flow of around £100m. For 2016/17 as a whole, BT would now expect a decrease in revenue of around £200m, in EBITDA of around £175m, and of up to £500m of normalised free cash flow due to the EBITDA impact and the one-off unwinding of the effects of inappropriate working capital transactions. For 2017/18, BT would expect a similar annual impact to revenue and EBITDA as in 2016/17, with the EBITDA impact flowing through to normalised free cash flow.