BT salvages merger and saves pounds 3.5bn

Chris Godsmark

Business Correspondent

British Telecom yesterday salvaged its planned merger with MCI, ending weeks of mounting uncertainty, by negotiating a cut of almost pounds 3.5bn in the purchase price for the US long-distance giant.

The talks between BT's board in London and MCI executives in the UK and US lasted until 3am yesterday morning, though both sides refused to reveal how close the companies had come to abandoning the merger, the biggest in British corporate history.

Sir Ian Vallance, BT chairman, said: "While it looked as if this partnership might not manage a rough patch of turbulence we have been going through, the fact that we have got through it was a testament to that partnership."

The deal was thrown into jeopardy after MCI's shock profit warning last month. The company predicted losses from its attack on the US phone market would double this year to $800m (pounds 500m).

The biggest surprise from the review was that Concert will push ahead with MCI's expansion into the $100bn local market, though the company predicted some scope for cost savings. Timothy Price, MCI president, said speculation that the company would cut 5,000 jobs was "completely wrong."

MCI has found it much harder to break into the local phone market than it had expected. Moves by federal regulators to open the local monopoly companies to competition have become bogged down with legal challenges.

The 22 per cent cut in the merger price went much further than the 10- 15 per cent predicted by most analysts and looked likely to satisfy BT's big shareholders, who were furious that the senior management had been apparently unaware of MCI's problems.

Shareholders will vote on the new terms at a second round of extraordinary meetings by early December, delaying the completed merger by some three months to 1 January. One BT investor said: "The cynical view on the price would be that things must be very bad at MCI, but we think the new deal is good news. The credibility of BT's management has been restored."

Under the renegotiated terms, BT is paying $18.9bn (pounds 11.9bn) for the 80 per cent of MCI it does not own, based on yesterday's closing BT share price, a reduction of almost 22 per cent over the old deal. It values MCI at pounds 14.8bn, down from pounds 19.1bn.

BT's shares soared 23.5p on the news to 436p, while MCI shares, which fell 15 per cent on Thursday, were up just 1 per cent in afternoon trading.

Sir Iain insisted MCI investors were not humiliated because the rise in BT shares yesterday had boosted the total value of BT's cash and shares offer. "It could well be that it is in the interests of MCI shareholders to have a smaller share of a bigger cake."

Tim Price, MCI's president, described the reduced price as a "win-win situation" for both companies. "We are excited by this deal, we are glad to have the deal back on track and we are waiting anxiously to close."

James Ross, from stockbrokers Hoare Govett, said the terms were "pretty sensible." He continued: "Of course it wasn't desirable that they got into this situation in the first place, but they seem to be back on track."

But the prolonged uncertainty since the MCI profits warning left a trail of discontent in the US, with investors who had gambled on MCI's share price nursing huge losses. Guy Wyser-Pratte, a leading US arbitrageur, said BT had walked away with a bargain. "A lot of people, including some of the better US analysts, got the outcome completely wrong. BT directors let people speculate about the review for weeks. I find that absolutely appalling."

Comment, page 19

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