BT pays out to avoid court battle over Italian scandal

* Takes 225 mln pound charge over Italian scandal

* Payout to Deutsche Telekom (IOB: 0MPH.IL - news) , Orange (LSE: 0OQV.L - news) avoids legal challenge

* Merges EE with consumer division, changes management

* Q1 core earnings in line with forecasts

* Shares (Berlin: DI6.BE - news) down 4 percent (Adds management changes)

By Kate Holton

LONDON, July 28 (Reuters) - BT suffered a 42 percent drop in quarterly profit after taking a fresh charge to avoid legal claims from two major investors over an Italian accounting scandal.

The British telecoms provider stunned shareholders in January when it revealed a 530 million pound ($693 million) black hole in its Italian accounts and a slowdown in UK government work, wiping 8 billion pounds off the company's value on the day.

On Friday BT said it had taken a 225 million pound charge to settle warranty claims from Deutsche Telekom and Orange which became shareholders as part of the sale of their mobile joint venture EE to BT in 2016.

BT also launched a new restructuring to simplify the business and changed several senior management roles, including the head of regulation, to help improve relations with the regulator which previously considered breaking BT up.

"Plenty of moving parts," said George Salmon, equity analyst at Hargreaves Lansdown (Frankfurt: DMB.F - news) .

"With BT fighting battles on several fronts, one could be forgiven for waiting for the dust to settle."

BT shares plunged to a three-and-a-half year low in January when it revealed the discovery of false accounting practices at its Italian unit, abruptly halting the gradual recovery it had made since 2008.

That scandal came in the middle of a bitter two-year battle with the regulator Ofcom over how BT runs Britain's core broadband network, which led to the company legally separating the asset in order to prevent a full breakup.

TURBULENT TIMES

To prevent such problems taking hold again, BT announced plans in May to cut 4,000 jobs and replace the boss of its global services division which was home to both the UK government and Italian work.

On Friday it said it would merge the mobile EE business into the Consumer division to promote the sale of multiple products, with Marc Allera, the head of EE, leading the combined business.

The head of BT Consumer, John Petter, will leave, as will the chief strategy officer, Sean Williams, who departs to make way for the head of Britain's water regulator, Cathryn Ross, to manage the relationship with Ofcom.

Petter was one of the architects of BT's aggressive expansion into sports broadcasting as it seeks to protect its consumer base from competitors such as Sky (Frankfurt: 893517 - news) .

"As BT emerges from a turbulent 12 months, a recent shake-up of personnel seeks to bring stability to the under-pressure organisation," said Paolo Pescatore at CCS Insight.

The unexpected payout to Orange and Deutsche resulted in first-quarter pretax profit falling by 42 percent, and sent BT shares down 2.3 percent to 308.7 pence by 1115 GMT, just above the 298 pence they hit on the day of the January profit warning.

"In common with any acquisition there were warranties put in place and the settlement today is to address that," Chief (Taiwan OTC: 3345.TWO - news) Executive Gavin Patterson told reporters.

"We're disappointed, this had only very recently come up," added Patterson, who missed out on his bonus last year because of the Italian crisis.

Patterson said a small number of class action lawsuits had been registered after the Italian scandal. He said he couldn't comment on how they would pan out but said he believed BT had a very strong case to defend them.

The settlement overshadowed an otherwise robust trading update, with revenue and core earnings in line with forecasts, helped by a 7 percent rise in Consumer revenue and a 4 percent rise in EE revenue.

BT reiterated its full-year outlook. For the current 2017/18 year, it has forecast that underlying revenue will be broadly flat and core earnings will fall to 7.5-7.6 billion pounds.

Its pension deficit at the end of June stood at 8 billion pounds net of tax, up from 7.6 billion pounds at the end of March. ($1 = 0.7652 pounds) (Reporting by Kate Holton; editing by Jason Neely/Keith Weir)