BT starts fight to win over US shareholders

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The Independent Online
British Telecom is to launch an unprecedented marketing campaign in the US in an attempt to convince sceptical American investors about the merits of its planned pounds 13bn merger with long-distance carrier MCI, before crucial shareholders' votes on both sides of the Atlantic next month.

At a series of road-shows for the US investment community over the next few weeks, BT will seek to head off any moves by shareholders to sell their stock immediately after the merger is completed, risking a downward spiral in the price. BT has claimed the tie-up will boost the two sides' profits by pounds 500m in five years through improved global marketing and savings on equipment procurement.

Under the terms of the deal, existing MCI shareholders will get 5.4 shares in BT - which will be renamed Concert after the two companies' business communications joint-venture - and $6 per share in cash. US investors are to vote on the merger at MCI's annual meeting on 2 April, while more than 2 million BT shareholders will be asked to approve the deal at an extraordinary general meeting at Wembley Arena on 15 April.

James Ross, telecoms analyst at stockbrokers Hoare Govett, explained: "There's obviously going to be some stock flowing back from the US because investors there won't want to keep it. The merged company won't sit so easily in their portfolios because it will clearly no longer be a domestic organisation."

The scepticism explains BT's plans to get permission to buy back up to 10 per cent of its shares immediately following the merger, which is due to be completed on 1 October. The move would enable BT to mop up any Concert stock dumped in the US. Shareholders will be asked to endorse the buy- back at the EGM in April.

What worries US shareholders most is that MCI's famously aggressive marketing-led culture, sharpened through bitter battles with arch-rival AT&T, will be swamped by BT's background as a bureaucratic, state-owned monopoly. Though MCI's domestic US business will continue to be run mostly independently from BT, investors suspect the UK management will exert a growing influence.

Moves by British executives to end MCI's long-standing policy of rewarding staff with generous share options is the most obvious example of the looming culture shock. MCI's annual report, filed this week, shows that options worth $195m (pounds 121m) were issued to staff in 1996, up from $167m the year before. Insiders estimate the merger will create at least 200 MCI millionaires.

Mark Lambert of NatWest Securities summed up the problem: "Concert will be a very different vehicle from MCI. It'll have lower growth than the American business and be less highly motivated managerially. If MCI has a fantastic year, it all gets diluted if BT merely has a good year."

The gap in growth prospects from the two companies' traditional markets is also yawning. In the nine months to December BT's turnover grew by 4.3 per cent to pounds 11.13bn. MCI's annual revenues in 1996 grew by 21 per cent to $18.5bn. It is hardly surprising that investors are sceptical about BT's claim that the deal will enable both companies to grow more quickly.

Conversely, British investors are having to get to know a lot more about MCI, which many regard as having historically put risk before reward. At the first analysts' road-show in Washington this week, MCI said it was considering accelerating its push into the $100bn-a-year US local telephone market as competition is gradually introduced. A 1996 law will progressively end the monopoly of local phone companies, the so-called Baby Bells, which were split off from AT&T in 1984. The changes will also allow regional operators to compete with MCI in the long-distance market for the first time.

So far MCI has pledged to invest $1bn in building local fibre-optic networks, of which some $600m will be spent this year. However Nate Davis, senior vice president of local markets, said investment could be pushed much further and brushed off the threat from the regional operators in the long-distance market. "They are going to be spending their time protecting their market share. We are going to be spending our time taking market share as an attack organisation."