Not even the HQ is safe from the debt cutting programme

Shareholders are to be offered three new shares for every 10 they hold, at a price of 300 pence a share. The price represents a 47% discount to the 568.5p at which BT shares closed on Wednesday.

The widely-expected announcement of the rights issue came as BT reported a �2.8bn pre-tax loss for its fourth quarter, pushing it into its first-ever annual loss.

It also said it would demerge BT Wireless - a division that includes mobile phone operator BT Cellnet - scrap dividends for this year and sell or demerge directory business Yell.

Shares tumble

BT shares tumbled 7% in morning trading as investors digested the news but had recovered to 544p - to be 4.3% down on the day - by 1335 GMT (1435 BST).

"The big question is where does BT go from here. To take up the rights you have to be comfortable about the strategy going forward," said Jeremy Batstone, head of research at NatWest stockbrokers.

"We are pretty much back to where we were five years ago. The company has been outmanoeuvred by Vodafone."

'Good start'

BT's new chairman Sir Christopher Bland said: "It will require determined and rapid action by management to achieve the transformation of BT.

BT timeline

1984 Privatisation, with millions of small investors buying shares 1985 First challenge to monopoly with launch of Cable & Wireless's Mercury 1993 Government sells remainder of BT shares it owned 1995 Sir Peter Bonfield appointed chief executive 1998 Concert global joint venture formed with AT&T 1999 Takes control of BT Cellnet 2000 Debt rises sharply following acquisitions 2001 Promises to cut �10bn from debts by end of year Chairman Sir Iain Vallance is replaced by Sir Christopher Bland Assets sold in Japan, Spain and Malaysia

"We have made a good start, the culture is changing and I am confident that we can complete the process in the best interests of our shareholders, customers and staff."

BT Wireless, which will have its own stock market listing, is expected to be one of the UK's biggest companies.

The remainder of BT, which includes the core fixed-line business, is to be renamed Future BT.

BT's existing shareholders will hold shares in both companies.

"These actions will provide shareholders with ownership of two strong, tightly focused, independent businesses, one high growth and the other well established and cash generative," chief executive Sir Peter Bonfield said.

Costly licences

The shake-up is BT's second corporate restructuring in six months.

The former state monopoly has accumulated debts of about �30bn through an international expansion - now partly aborted - and the acquisition of costly third-generation mobile phone licences.

It has already replaced Sir Iain Vallance as chairman, with BBC chairman Sir Christopher Bland, in an effort to win institutional shareholders' backing for the rights issue.

Pressure has also increased on chief executive Sir Peter Bonfield.

On Thursday, he said he would be staying at least until the end of next year to oversee the restructuring although his position was "flexible" after that.

Underperforming

BT has seen its shares tumble 65% since the beginning of last year - and is still underperforming most of its debt-laden European telecoms peers.

BT's brokers, Cazenove and Merrill Lynch, had advised the company to opt for a deeply discounted rights issue to ensure sceptical investors came up with the cash required.

Besides reducing debt, BT has hoped that measures also including capital spending cutbacks, the sale of interests in Japan, Spain and Malaysia, and other asset sales including property and vehicles will help it keep its coveted "A" grade credit rating.

But Standard & Poor's on Thursday cut BT's rating to "A-", saying the demerger of the wireless business removed "the most significant streams of future revenue and earnings growth".

A downgrading is expected to lead to a substantial increase in the amount of interest BT has to pay on its remaining debts.

Public offering abandoned

BT on Thursday said it was on target to reduce debt by �10bn by the end of this year.

It gave few details on plans for demerging BT Wireless, other than saying it hoped to implement the action towards the end of the year.

Plans for a public offering of BT Wireless shares were abandoned because weak investor sentiment towards telecoms would have destroyed shareholder value.