BT poison pill deprives shareholders of their say

COMMENT

Most big mergers in the US carry so-called "break-up fee" clauses, under which each party agrees to pay the other a substantial sum in compensation should for any reason it wish to pull out of the deal. They are also relatively common in mergers between British and US companies. Wall Street bankers generally insist on imposing their own ways and practices on the City. But can anything justify the $750m BT has promised to pay MCI should its own shareholders fail to agree the merger? There was a similar break-up clause in the original merger proposals, but it wasn't quite as bluntly phrased as this one, nor was it nearly as large. The damages that became payable in the original merger agreement were only $150m, rising to $450m in exceptional circumstances.

Upping the ante forms part of the renegotiation of the merger, so BT can reasonably argue that it was just the price that had to be paid for lower terms. MCI was able to say: "You're asking for this big reduction in the price of the deal, but you're going to have to give something in return. If your shareholders cut up rough we want big damages".

There is a possibility they will cut up rough, even though it seems unlikely they will vote against the transaction in significant numbers. As our story opposite explains, things are even worse at MCI than anyone thought. On top of the soaring costs of MCI's assault on the local telecommunications market in the US, MCI is proposing to make extraordinary charges in its next figures running to "hundreds of millions of dollars" against the costs of restructuring its core long-distance business. This goes some way to explaining how BT achieved such a substantial downward revision in the terms. Plainly BT's case for doing so was a rather better one than MCI was letting on.

All of which will further unnerve BT's shareholders as they attempt to decide on the merits or otherwise of this merger. Just in case any of them were thinking of voting against the board, however, BT has now made it that much harder for them to do so by upping the break-up fee to near- prohibitive levels. It has also reduced the level of support it needs in a shareholder vote from 75 to 50 per cent. These things may be common in the US, but they shouldn't be allowed to become an acceptable part of the UK scene. The effect of such a poison pill arrangements is to deprive shareholders of their say over matters where the listing rules require that they have one. This is an unfortunate precedent for BT to have set and it sours what otherwise looked like an impressive piece of renegotiation.

Bundesbank bewitching time is here again

The witches' cauldron of the currency markets has a new ingredient: a pinch of fresh interest rate speculation carefully added by the Bundesbank, stirring hard. This strong brew has, for now, neutralised the old, stale flavour of fear of higher US and UK rates.

There are other things bubbling in the mixture. The big unknown is still the outlook for European monetary union, which could raise its ugly head once again as the month draws to a close and continental politicians return from their holidays. There is a chasm between those in the financial markets who still expect the euro to turn out a weak currency, fudged into existence to avoid delay, and those who think it will be a narrow, strong version.

If the balance tips in favour of the latter, the small but perfectly formed euro, it will send the mark much higher than its present level. The series of crucial EU meetings between now and next spring is a recipe for currency turbulence.

Just as important, however, is the question of how strong a spell the Bundesbank - and to a lesser extent the Bank of England - have cast over international investors. The German central bankers have manipulated expectations that they will raise interest rates, by indicating a switch from a fixed to a variable rate in their repo arrangements and by reverting to a weekly announcement. These actions signal readiness to move if the authorities think it necessary.

Yet if the mark remains at its new levels without them having to act, there is no guarantee that they will. For even with inflation "jumping" to 2 per cent, the German economy is still in a sorry state, and the French economy sorrier still. The last thing the German government wants is for the central bank to provoke the new socialist Government in Paris by tightening monetary policy just as key EMU decisions are due.

Likewise, the Bank of England has indicated that there is scope for a pause in the upward path of UK interest rates, but the length will depend on how the economy behaves - specifically, how much of our windfalls we all spend - between now and Christmas. If there is more boom than bust in the monthly figures for the Anglo-Saxon economies, the present haze over the international currency markets will lift, revealing that the Bundesbank's magic incantations have not really changed anything at all.

Florida lights up tobacco barons' lot

Florida's $11.3bn settlement with the cigarette manufacturers this week is a significant victory for the state, which has a guaranteed payout over 25 years even if the recently negotiated national settlement fails to clear its remaining hurdles. The bigger winner by far, however, is the tobacco industry.

Tobacco executives are rubbing their hands with glee, because the terms of the Florida deal, essentially a mini-version of the landmark $368.5bn national agreement thrashed out earlier this summer, make the larger prize much more likely. A few more agreements along the lines of the national model - a 25-year payment, with restrictions on advertising near schools and on vending machine sales - and it will be difficult to argue the terms are not acceptable to every state. That means the end of damaging class actions and a cap to the industry's health-related liabilities are probable rather than possible. No wonder BAT's shares bucked the falling market yesterday.

The deal is also attractive to Florida. It knows how much it will receive from the agreement and marginally accelerates its receipt of the payment. If the national deal is ratified it will supersede the individual settlement, but Florida has eliminated the risk that it will not be approved by Congress.

That remains a real possibility, with the hard-line anti-smoking lobby still unhappy about several of the deal's clauses. As far as they are concerned the agreement gives the tobacco giants too many let-outs on issues such as reducing nicotine levels and reducing the proportion of under-age smokers. Worse than that, the settlement appears to allow for all but an initial $10bn downpayment to be recouped through higher prices to consumers.

The agreement is not a punishment for the industry but a tax on its addicted customers. Faced with such an attractive clean slate, it is no wonder that top tobacco men are prepared to admit anything, up to and including the link with cancer.

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