BT may be able to reshape merger

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British Telecom may be entitled to renegotiate its $20bn takeover of MCI because of the sharp deterioration in prospects for the US company's core long-distance telephone business.

This emerged last night as a team of top BT executives, led by chief executive Sir Peter Bonfield, prepared to fly out to Washington on Monday to begin a detailed review of MCI following its shock $800m profits warning last week.

It appears that under the merger agreement with MCI, BT is not entitled to renegotiate the price of the merger because of deepening losses on MCI's attempt to enter the local US market - the cause of last week's profit warning.

But institutional investors in BT have been told by advisers in the US that the worsening position of MCI's $15bn long-distance telephone business does constitute grounds for renegotiation. MCI is the second largest long- distance operator in the US.

But in its profits warning it said: "Ongoing competition in MCI's core business continues to intensify with pricing trends continuing to decline. Furthermore, MCI is experiencing negative impacts on its core business due to redeployment of marketing, operations, and product development resources from the core business to local.

According to some estimates, as much as half the increased losses MCI is warning of may be linked to the situation in its core business rather than the local loop.

James Dodd, telecoms analyst with Dresdner Kleinwort Benson and a long- standing critic of the MCI merger, said the worsening in its core business was to real problem. "This is the substance of the BT purchase, not the local business. BT should walk away because it is going to get much worse."

He estimates that if the merger goes ahead then the enlarged company, to be known as Concert, will lead to a dilution in earnings of 20 per cent compared with BT's initial estimate.

BT continues to argue that material changes in MCI's performance constitute grounds for renegotiation - something which appears to be disputed by MCI. The two companies are also in disagreement over precisely when it became apparent that MCI's local network losses would be worse than expected.

One large BT shareholder said: "The process of disseminating information has not been handled at all well. What we need to know, preferably by the end of this weekend, is whether BT is going to renegotiate and if so on what basis. This is a test of BT and at the end of week one it has not come out smelling of roses."