BT and MCI review $29bn merger price
Friday 22 August 1997
As the latest twist in the saga unfolded, the US telephones watchdog, the Federal Communications Commission (FCC), last night formally approved the deal, clearing the biggest regulatory hurdle in its way. The move, widely expected, came after MCI said it supported moves in the UK to give rival operators enhanced access to BT's network.
In a short and carefully worded statement, released first by MCI and then yesterday morning by BT, the companies said: "BT and MCI are having discussions concerning the economic terms of their existing merger agreement." It continued: "There can be no assurance as to the outcome of the discussions."
BT launched a review of the merger last month after MCI issued a surprise profit warning. The US long-distance giant said losses from its assault on the local American phone market could double to $800m.
Yesterday's announcement led to a sharp rise in BT shares, which jumped 29p, to 412.5p. On Wall Street, MCI shares plunged 17 per cent to close at $30.60 in hectic trading. Analysts said doubts about the BT/MCI merger contributed to a 127.28-point decline in the Dow Jones Industrial Average to 7,893.95. Profit-taking, higher interest rates and a weak dollar also took their toll.
The two companies refused to elaborate on the statements, leaving analysts and investors guessing about the current state of the talks. Last night there was growing speculation that BT would make a more detailed announcement on the deal today, with some analysts suggesting it could be about to abandon the tie-up completely.
The joint review committee investigating the merger terms met on Wednesday, apparently to agree a finished report which would be sent to the two company boards. MCI followed with a board meeting that night.
One possible reason for the statements yesterday was that lawyers were concerned that the partners were misleading the financial markets, after speculative press reports had repeatedly suggested the deal would go ahead on the existing terms. BT would then have made big cuts in MCI's investment programme in the $100bn local phone market.
Another suggestion by analysts was that the MCI statement was released unilaterally to put pressure on BT, which then hastily released an identical statement to head off speculation of a rift. "MCI seems to be putting a sell-by date on this deal. Some breakdown seems to have happened and at the moment nobody at BT is in control," said one analyst.
BT directors were believed to have discussed the committee's conclusions at a scheduled monthly board meeting yesterday. At least one senior MCI executive, possibly Douglas Maine, the finance director, was thought to have flown over to the UK. However, the two MCI directors on BT's board, chairman Bert Roberts and chief executive Gerald Taylor, were not believed to have attended the meeting in London.
BT declined to confirm whether the board meeting had taken place, or whether further information would be released today. However, company sources said relations between executives from the two groups remained "as amicable as ever".
A BT spokesman insisted that the outcome of the review was still due to be revealed by the end of the month. "We'll complete it as soon as we can and probably by the end of August."
Most large BT shareholders welcomed the statements as confirmation that BT was seeking to cut the price of the merger. One institution urged BT to press for a reduction of up to 20 per cent in the deal price, while another said the minimum cut acceptable to investors would be 10 per cent.
BT is buying the remaining four-fifths of MCI it does not already own for a mixture of BT shares and cash. It took a 20 per cent stake in MCI in 1994 and has forged ahead with a joint venture, called Concert, in international business communications.
One investor said: "You can read anything into this. But renegotiation up front is the only way forward. This looks like MCI accepts that reality."
But analysts doubted whether the secret clauses in the merger agreement allowed the price to be lowered.
Another problem was the likelihood that a reduced takeover price would need to be approved by shareholders, delaying the completion of the merger further.
Andrew Moffat, from Societe Generale, warned that MCI's position was stronger than BT's. There has been speculation that other US phone groups were waiting in the wings to make a bid approach.
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