Deutsche Telekom, the giant German telecoms group, is British Telecommunications' preferred buyer for Mercury Communications, the UK's second-biggest telephone company, following any merger with Cable & Wireless, Mercury's parent.
BT believes that bringing in Deutsche, which is to be privatised later this year, would open up the British telephones market to real competition for the first time. It would also ease the pressure from the regulator, Oftel, which has caused BT's recent share price to underperform the market drastically.
The Mercury sell-off, along with the disposal of C&W's Mercury One-2- One mobile telephones operations, will almost certainly be forced on BT by government competition rules, if a merger goes ahead. But BT, to which Peter Bonfield of ICL recently moved to become chief executive, will be in a strong position to dictate terms if a pounds 35bn merger with C&W can be consummated. The Government is said to have given "more than a nod and a wink" to the deal as part of a desire to have a strong UK champion in the telecommunications industry.
Observers say it is ready to use its golden share to block any foreign takeover of C&W, which is putting pressure on the group to reach agreement with BT.
Adding to that pressure is the continued failure of C&W to find a new chief executive. The group, which has been rudderless since both its former chairman, Lord Young, and chief executive, James Ross, were ousted last year, is said to have lined up an American to fill the top executive post, but he will not move until the outcome of the merger talks is clear.
The sale of Mercury to Deutsche would give the British group a well capitalised parent which, like BT, is having to make a rapid transformation from state- owned to private sector operator. Deutsche, which is due to float in a pounds 7bn privatisation later this year, has been interested in picking up Mercury for some time. BT's chairman, Sir Iain Vallance, maintained close links with Helmut Ricke, the German group's chairman until his resignation in 1994. Sir Iain gave advice on the privatisation and in the course of many discussions the subject of a possible deal between BT and C&W was raised, leading to Deutsche's initial interest in Mercury.
The possibility was revived last year when a BT executive made a courtesy call on Deutsche in December, and again within the past fortnight.
But Deutsche will not have the field all to itself. AT&T, the US telecoms giant, and Nynex, a US "baby bell" which owns the second-largest cable operator in the UK, are being seen as serious rival bidders. AT&T has already held discussions with C&W over Mercury, but the price demanded was too high.
US West, C&W's partner in the Mercury One-2-One mobile telephone operation, has right of first refusal over the British group's 50 per cent stake, valued at around pounds 800m by analysts.
At present the talks between BT and C&W are only being conducted through merchant banking advisers - Rothschilds for BT, Goldman Sachs and ING Barings for C&W - and the two sides stress that they are in no hurry to complete a deal.
A BT spokesman yesterday refused to comment, beyond saying that reports the company was ready to sell Mercury to a US consortium of investors were "without foundation". However, the Independent is aware that a buying group has been put together and has made an approach for the company.