BT, headed by Sir Iain Vallance, is the UK's most successful privatised company, employing 128,000 people. One spin-off of the takeover will be that it will take a stake in Rupert Murdoch's media empire News Corporation now held by MCI through a series of joint ventures.
The takeover will dwarf the pounds 9bn takeover of the Wellcome drugs company by Glaxo last year and catapult BT into premier position in the world telecommunications market.
It will create a company with sales of pounds 24bn, 180,000 employees and a stock-market value of pounds 35bn - BT's stock market value is pounds 22.8bn and the takeover values MCI at $21bn (pounds 12.8bn). Such a giant would be capable of competing head-to-head with the giant US telecommunications operator AT&T.
The merger was hatched inthe greatest secrecy, and will be voted on by the boards of BT and MCI over the weekend followed by a formal announced on Monday. The deal represents a coup for BT after the collapse earlier this year of plans to merge with its UK rival Cable & Wireless. That deal would have created another international telecommunications colossus worth pounds 33bn.
The higher valuation of BT indicates that the British company could emerge with a controlling stake of around two-thirds in the combined group. Other reports last night suggested it would buy MCI outright offering a mixture of cash and its own shares.
BT paid $4bn for a 20 per cent stake in MCI in 1993 but since then it had been prevented from increasing its shareholding by US laws which limit foreign ownership of telecommunications companies to 25 per cent. The US telecommunications market has recently been liberalised and deregulated by the Telecommunication Act 1996 allowing much greater freedom in both local and long-distance telephone services.
BT sources said it was this legislation which had enabled it to put together the MCI merger. But a spokesman for the US Federal Communications Commission warned last night that it would take several months to vet and approve the deal.
He also said it would only be permitted if the two companies could demonstrate that US telecommunications operators would have the same access to the UK market that BT and MCI will have in North America.
BT already has joint ventures in France, Germany, Italy, the Netherlands, Spain, Scandinavia and parts of the Far East. But the takeover of MCI will put it on a new plane. One source close to the talks said last night: "If all goes well then BT will leapfrog its rivals to become the world's leading global telecoms operator." All BT's other alliances are already linked up to MCI through a world-wide voice and data network known as Concert.
BT is the biggest telecommunications group in Europe after Germany's Deutsche Telecom. Despite growing competition, it still commands more than 90 per cent of domestic customers and two-thirds of the business market. Last year it made pre-tax profits of pounds 3bn.
Labour's telecommunications spokesman, Geoff Hoon, said: "It is important that BT should develop a global operation because that is the way in which telecommunications is developing." The Department of Trade and Industry said it was too early to say if there could be any regulatory hurdles.
MCI was founded 30 years ago and has grown to become the third biggest long-distance operator in the world and the second biggest in the US after AT&T. Last year it invested $1bn in Mr Murdoch's News Corporation network and agreed to the joint development of a $1.3bn direct broadcast satellite television network.
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