UPDATE 3-BT shares hit 5-1/2 yr high ahead of sports TV battle

Fri May 10, 2013 9:54am EDT

* FY rev down 5 pct at 18.25 bln stg vs consensus 18.1 blg

* FY adj EBITDA up 2 pct at 6.2 bln stg vs consensus 6.1 bln

* Expects 2014/15 EBITDA to rise to 6.2-6.3 bln

* Ups FY div 14 pct to 9.5p, plans 300 mln stg buyback

* Shares up 9 percent, hit 5-1/2 yr high (Adds TV details, updates shares)

By Kate Holton

LONDON, May 10 (Reuters) - Britain's BT underlined its return to form ahead of its pending pay-TV battle with BSkyB , revealing across the board improvements that put it on course to regain the upper hand in the telecoms sector.

Its shares leaped more than 10 percent to their highest in some 5-1/2 years.

The 167-year-old former state monopoly, which was brought low in 2008 by a series of profit warnings, posted full-year results ahead of expectations and showed for the first time it could be close to returning to overall revenue growth.

The results followed a tough cost-cutting drive imposed by Chief Executive Ian Livingston, which enabled him to steer the group through the economic downturn by raising profits and the dividend while still investing in a superfast network.

"We are doing what we said we would do," Livingston said. "In an environment where it is easier to focus only on the short-term, we are investing in our future and delivering growth in profits and dividends."

With BT's fibre network now available to more than half of the homes and businesses in Britain, BT will soon embark on the next phase of its strategy - offering free English Premier League soccer to customers in a direct challenge to BSkyB.

The offer is designed to increase customer loyalty and win back some of the millions of broadband and telephone customers who have dropped BT in favour of BSkyB, Virgin Media and TalkTalk in recent years.

The surprise announcement of the free offer on Thursday sent shares in rival groups tumbling and revealed the depth of concern among investors in a sector that has grown recently by persuading existing customers to pay more for an increasing number of services.

That strategy, employed particularly by Rupert Murdoch's Sky and Virgin, could now prove a lot harder.

"The risks to all operators in the UK market are clear," analyst Robin Bienenstock at brokerage Bernstein said. "We think that this is the end of price inflation in the UK Pay TV market, ushering in an era of increasing pressure on TV margins."

ATTRACTIVE PROGRAMMING

While BSkyB still owns the rights to much of the most attractive programming available in Britain, the move by BT shows its long-term intent to compete aggressively in the pay-TV market, while using its scale to absorb the required costs.

"We believe that the move is logical," Liberum analyst Lawrence Sugarman said. "We suspect that BT is prepared to pursue this strategy because it is coming from a position of strength."

The results released on Friday showed how BT has recovered from tough times in 2008 and 2009 and are testimony to the success of a strategy put in place under Livingston since his appointment in June 2008.

Adjusted EBITDA or core profit was up 2 pct at 6.2 billion pounds against a forecast 6.1 billion, despite revenue for the year through March being down 5 percent, or 3 percent on an underlying basis.

The performance contrasts with recent statements from BT's peers in continental Europe, which are being squeezed by weak economic conditions, stiff regulation and increasing competition.

Spain's Telefonica for instance, Europe's biggest telecom group by revenue, this week reported an 11.7 percent drop in revenue from its European operations to 6.7 billion euros. Its shares are worth about half their value set in a 2008 peak.

Shares in BT were up 10.5 percent by 1230 GMT, topping the FTSE 100 gainers list and adding to the 26 percent rise in the stock recorded in the last year.

BT benefited from strong demand for broadband and its new superfast fibre network, which is being sold to around 1.3 million customers.

It raised its full-year dividend by 14 percent to 9-1/2 pence per share and announced a share buyback programme of 300 million pounds for this financial year and next.

It also nudged its outlook higher, with free cashflow now forecast at 2.6 billion pounds in 2014/15, compared with an earlier forecast of 2.5 billion.

"BT has hit a sweet spot," said Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers. "Prospects for the company look extremely attractive. In addition ... the company has underlined its confidence in providing earnings visibility two years out." ($1 = 0.6453 British pounds) (Editing by Christine Murray and David Holmes)