By Kate Holton and Paul Sandle
LONDON (Reuters) - Just weeks before a high stakes auction for TV rights to top European soccer, the CEO of Britain's BT <BT.L> is locked in a fight on multiple fronts, leaving the communications giant with little room for manoeuvre.
Gavin Patterson, a 49-year-old former marketing man, stunned investors this week when he revealed a sharp slowdown in core markets and tripled the expected hole in BT's finances from an Italian accounting scandal, wiping a fifth off its market value.
Shareholders say they still back Patterson, but they question his control of a group on the cusp of a period that will shape the future of the 171-year-old firm that supplies broadband and TV in Britain and IT services around the world.
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"Management credibility has taken a hit," one top 10 shareholder said, on condition of anonymity. "We're trying to understand how this was able to happen. It's a black mark (after) a 12-month period that turned into a perfect storm."
Patterson, a Cambridge-educated exec whose shoulder-length hair and sharp suits mark him out from the crowd, said he had taken decisive action and would continue to do so. He had previously helped to grow the share price by 60 percent before it started to slide at the beginning of 2016.
BT will now take on arch rival Sky <SKYB.L> in a fight to retain Champions League TV rights in an auction set for March.
Patterson also needs to end a damaging regulatory row over its ownership and running of the country's broadband network and agree a funding plan to tackle its ballooning pension deficit, both legacies of its former life as the state telephone company.
All will require injections of cash, just as the firm is balancing a cut to cash flow targets of 20 percent and a pledge to grow dividends by 10 percent this year and next.
His first job will be to get to the bottom of what happened at BT Italia, a tiny part of the business which has damaged the wider group.
BT said it first realized all was not well in Milan after it was approached by a whistleblower last summer.
It asked auditor KPMG to investigate and discovered what it described as a sophisticated and complex web of transactions in Italy conducted by a handful of senior staff to mask the true performance of the business, and designed to go unnoticed.
The company was also caught off guard when demand from the British government and multinational corporations slumped in recent months. The twin shocks forced BT to cut its profit and cash targets for the next two years, leaving Patterson with far less firepower than expected for the challenges ahead.
"He is fighting on a lot of fronts," Richard Marwood, senior fund manager at shareholder Royal London Asset Management, told Reuters, adding that he backed the management team.
"To be dealing with the pension fund or the regulator or the sports rights or Italy in isolation would be distracting. But to have it all going on at the same time, it's clearly going to be very, very hard work for the board."
Following the hit to the business, BT now sees 2017/18 free cash flow at around 3.1 billion pounds. It is expected to commit to pay around 1 billion pounds a year into its pension scheme when it agrees a new funding deal in early 2018, according to shareholders and analysts.
That would leave 2.1 billion pounds to cover a planned dividend of 1.7 billion pounds, and meet investment needs.
Investors are also keen for BT to resolve a long-running argument with the regulator Ofcom, which had threatened to force BT to spin off the country's core broadband network into a separate company to spur greater investment and boost speeds.
Striking a more conciliatory tone on Friday, Patterson said he hoped the two sides could agree a deal soon, and some shareholders said they would not be surprised if the firm agreed to increase its spending on the network to ease a deal through.
Perversely, BT's weakened position may help it in its battle with Ofcom, because if the regulator forces BT into a costly settlement, hitting cash flow, it could alarm pension trustees to such an extent that they demand higher top ups in the scheme, reducing BT's cash and leaving it with less to invest.
Royal London's Marwood said shareholders would want BT to be allowed by Ofcom to charge other providers enough to make a reasonable return on its investment in the network.
BT's row with the regulator has led to months of negative headlines, with rivals and politicians lining up to criticize the firm for what they say is a failure to invest enough to provide a decent broadband service.
It announced an inflation-busting price rise this month, limiting its options for further increases this year and potentially angering customers if it does not retain the rights to show teams like Barcelona and Bayern Munich in action.
FIRST BIG TEST
The Champion League will be the first test of its resolve. BT first signaled its willingness to spend big on content to draw in customers when, in 2013, it paid more than double Sky's previous deal to win all the rights for the European tournament.
Since then content inflation has continued at a heady pace, with analysts penciling in a 30 percent rise in the price to win the rights for the European blue-riband event.
Analyst Guy Peddy at Macquarie Capital said Sky had the firepower to bid aggressively to win back Champion League rights, and has penciled in a bid of 400 million pounds, against the 299 million pounds per season paid by BT last time.
"Sky winning the Champions League rights in the UK would seriously dent BT's Pay TV aspirations and underwrite Sky's TV strategy," he said in a note.
Simon Johnson, who has negotiated sports deals for broadcaster ITV <ITV.L> and the Football Association, said the price BT was willing to pay would come down to whether it could risk losing the rights, and still grow the consumer business.
"The trick is to work out whether BT Sport can sustain the same premium that they had last time, which was effectively a 'blow the opposition out of the water' figure," he told Reuters.
The multiple demands on a firm that employs more than 100,000 people across Britain and 180 countries worldwide, will fall to Patterson to resolve. Four days on from the sharp fall in the share price, there has been no sign of a recovery.
Patterson had won plaudits for his strategy of buying content rights and a mobile business, EE, to retain domestic customers and corporate clients.
He has said he is angry that the integrity of BT has been undermined and was improving controls across the group. He urged shareholders to focus on the rest of the business that was thriving under his strategy.
"Many of our shareholders are unhappy and they have a right to be," he said. "(But) we need to keep this in perspective."
(Editing by Philippa Fletcher)