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BT's cash conundrum

Source: www.breakingviews.com is Europe's leading financial commentary service.

BT has come a long way. Two years after its £6 billion (€9.6 billion) rescue rights issue, the UK telecom is throwing off cash again.

BT should generate about £1.8 billion of equity-free cashflow - the cash after interest and tax that is available for dividends or paying down debt - this year. And that makes a £16 billion market value look rather mean. After all, the cashflow yield of 11.2% compares with a telecoms sector average of 10%.

Investors seem concerned that BT's sales will fall and erode this. However, these concerns are starting to look overblown. BT's growth outlook, while dull, does not qualify as a disaster. What's more, there are levers that can be pulled to protect cashflow from sluggish revenues. Equity-free cashflow could easily grow over the next few years.

Core business under attack This year will be tough for BT. The regulator has made it easier for resellers to compete for local calls. And this has attracted such companies as Carphone Warehouse and Tesco into the market. The deregulation of directory enquiries has also been a blow. All this will exacerbate the decline of BT's core business.

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