PG Procter and Gamble Co

By Stu Woo and Simon Zekaria 

LONDON--One of Britain's oldest and best-known companies lost a fifth of its value Tuesday after saying it had grossly underestimated the severity of an accounting scandal at its Italian business.

BT Group PLC, parent company of British Telecommunications, said it was taking a write-down of GBP530 million ($661 million), more than three times its previous estimate of GBP145 million, for yearslong "improper" accounting practices and transactions in Italy.

In addition, BT lowered its forecast, citing a deteriorating outlook for business from the British public sector and international corporations.

The dual shocks sent BT shares tumbling 19%, wiping about GBP7 billion off its market capitalization, which stood around GBP31 billion as of the early afternoon. They also dealt a setback to the high-spending ambitions of BT Chief Executive Gavin Patterson, a former Procter & Gamble Co. shampoo executive known for his salt-and-pepper mane and open shirt collars.

In October, BT announced an internal investigation into its Italian business. The company said Tuesday that the investigation, which included an independent review by auditing firm KPMG LLP, found that "the extent and complexity of inappropriate behavior in the Italian business were far greater than previously identified." BT said only that the activity involved improper sales, purchase and leasing transactions, which led BT to overstate its Italian profit over "a number of years."

The company said it suspended several executives in Italy, who have since left the business. BT has also appointed a new chief executive of BT Italy to take charge Feb. 1. BT focuses on business customers in Italy and has no consumer-focused brand. In 2015, the last year for which data are available, BT had 2.3% of the total fixed-line and mobile customers' expenditures in Italy, according to the country's telecom regulator.

BT said it still expected to increase its yearly dividend by 10%, while fiscal third-quarter earnings were in line with market expectations after stripping out the write-down's impact.

Mr. Patterson has tried to remold BT's image as a 171-year-old former state monopoly that controls Britain's landline-telephone network to that of an digital juggernaut that can provide mobile services, high-speed internet and televised sports games. BT surprised the U.K.'s media establishment by winning a three-year, GBP900 million contract to air Europe's flagship soccer tournament starting in 2015.

Tuesday's setbacks shouldn't hinder BT's ability to compete in the coming sports-rights auctions, said Raymond James analyst Stéphane Beyazian. "Financially, the company is sound, but there are more structural challenges coming," he said. Mr. Beyazian said Sky PLC, BT's major TV-and-internet-provider rival, presented a serious challenge to BT with its new mobile-service offering.

21st Century Fox Inc. has announced plans to buy the 39.1% of Sky it doesn't already own. Billionaire media mogul Rupert Murdoch and his family are major stakeholders in Fox and News Corp, publisher of The Wall Street Journal.

Write to Stu Woo at Stu.Woo@wsj.com and Simon Zekaria at simon.zekaria@wsj.com

(END) Dow Jones Newswires

January 24, 2017 09:26 ET (14:26 GMT)

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