BT decides it's good to talk

SHARES in telecoms group Cable & Wireless had a lively ride last week after news broke of the group's secret takeover talks with its rival, British Telecom.

While caught out on the timing of the talks, the stock market was less surprised that the two groups had been contemplating such a move, given the strategic logic in joining forces to create a global telecommunications empire.

For BT in particular, expansion to greener pastures outside the heavily regulated UK market is tempting. The specific lure of Cable & Wireless is its 57.5 per cent stake in Hong Kong Telecom, a highly profitable business that contributes the lion's share of Cable & Wireless profits and whose control would give BT a valuable stake in the fast-growing Asia-Pacific market.

Price appears to have been the main issue on which the talks ran aground - the two companies were unable to reach agreement on a valuation to satisfy both sets of shareholders. The problem was complicated by the proposed method of merger, a reverse takeover with Cable & Wireless buying its bigger rival, BT.

Such a move would be a neat way of sidestepping a full-scale offer for Hong Kong Telecom, which would have added pounds 6bn to the estimated pounds 10bn merger price. C&W buying BT would also reduce the risk of overseas governments cancelling existing licences if C&W changed hands.

But although it has manoeuvred around some of the obstacles, a merger between the UK's two largest telecom companies would also run into a regulatory minefield, not least in the UK.

With the beady eye of the telecom regulator, Don Cruickshank, fixed upon BT's dominant market share, it is a certainty that any deal would require the disposal of Mercury Communications where C&W has an 80 per cent stake. Nor would BT be allowed to retain C&W's stake in the Mercury One-2-One mobile phone business alongside its existing Cellnet operation.

Mercury may have failed to make a big dent in BT's total market share, but it remains BT's only significant rival in the UK and the regulator would be keen to see its position secured, whether it was acquired by another operator - US group AT&T has been mentioned as a possible suitor - or whether it was floated off.

If merger talks are renewed, the outcome could be a more radical shake-up in BT's structure, which would give it more scope to expand overseas.

"It is clear that both companies have recognised the logic of such a deal. BT needs to break out of its regulatory log-jam, while Cable & Wireless is too small," said one analyst.

Floating all or part of BT's UK business is one possibility that is mooted although, says competition lawyer David Aitman at Denton Hall, this would be scrutinised by Oftel. "BT is the primary provider and owns the network. Such a move might dilute its public responsibility in the eyes of the regulator."

Nobody would underestimate the complexities of agreeing a deal to satisfy all parties, not least shareholders. "The news of the merger talks is not a signal that C&W is in play," says analyst Martin Mabbutt at brokers James Capel. "Rather, it demonstrates that C&W cannot be taken out unless it wants to be."

How BT and C&W compare


No of employees 125,000 41,000

Forecast pre-tax profits pounds 3bn pounds 1.45bn including

to March 1996 exceptionals

Markets Operating in more Operating in more

than 30 countries, than 50 countries

with main areas in including Hong Kong

Europe, Pacific rim, Europe, Caribbean

and via partner and Americas

MCI in America

Market capacity pounds 22.3m pounds 10.3m

No of shareholders 2.5 million 175,000