BT urged to renegotiate $20bn merger

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British Telecom was under mounting pressure last night to renegotiate its $20bn (pounds 11.8bn) takeover of MCI or pull out of the deal altogether after the shock profits warning from the long-distance US telephone operator.

As the City digested the scale of MCI's problems, the BT share price plummeted by nearly 8 per cent wiping pounds 2.35bn from its market value and prompting BT's chief executive Sir Peter Bonfield to embark on a series of emergency briefings with institutional shareholders.

Sir Peter said that although he was "surprised and a bit disappointed" at the suddenness of MCI's profits warning, it was premature to say whether BT would now insist on renegotiating the terms of the merger.

However, there was little doubt in the City that the news had dealt a severe blow to BT's credibility and the prospects for Concert, the pounds 36bn group that will be created through the takeover of MCI.

A number of institutions said the deal would have to be renegotiated at least while James Dodd, telecoms analyst with Dresdner Kleinwort Benson and a long-standing critic of the merger said BT should scrap the takeover altogether and use the money to fund a share buyback.

If BT pulls out it would face a penalty payment of $150m-$450m under a poison pill clause in the agreement. But Mr Dodd said: "BT should pull out. Spending $150m to save $20bn is the best investment it could make."

MCI warned on Thursday night that losses this year on its move into the local US telephone market were likely to reach $800m - double the level previously forecast - and could be even higher in 1998, the year in which it had been budgeting break-even. MCI's attempt to conquer the domestic market in competition with the regional Bell operating companies, is likely to result in losses being $1.2bn more than expected.

A number of large shareholders were askance that BT and MCI could have been unaware of the scale of the losses after working on the Concert deal for nearly a year and just two months before they expect to get final approval for the merger from US regulators.

"The terms of the merger have to be renegotiated now, this is such a significant event that the two companies have got to sit down and talk about what an appropriate value is because that value has clearly changed," said one institutional investor.

"It looks like all the earnings growth potential of Concert has disappeared for the next two to three years. That is a long time to expect shareholder to put up with earnings dilution of that type."

There was also undisguised anger that investors were not put in the picture at the time when BT and MCI were getting shareholder approvals for the merger. "We are very disappointed," said one institution. You would have though the due diligence would have pulled some of this into the open and that BT could have shared it with investors at the time they were voting the deal through. MCI's move into local telephony is the major growth strategy for Concert over the next few years and yet no-one seems to have spotted the problems. What on earth has been going on?"

Sir Peter said BT had only become aware of the increased losses on Wednesday night when he attended an MCI board meeting in the US along with two other BT directors, Sir Colin Marshall and Keith Oates.

At that meeting a collective decision was taken by the MCI board to press ahead with its domestic strategy despite the increased investment and losses it would entail. Sir Peter then reported back to a meeting of the BT board on Thursday. The BT board, however, refused to endorse the strategy decided by the MCI board and is now assessing whether so much extra money should be committed or whether there is a better way of helping MCI attack the domestic market, using BT's experience.

BT has cancelled leave for a number of senior executives and sent a specialist team to the US to analysis MCI's figures. "There is going to be a lot of very tough talking and a lot of eyeballing." said one observer.

BT and MCI blamed the higher losses on anti-competitive practices by the local Bells which had slowed up MCI's entry into the local market and forced it to increase spending on capital equipment, marketing and customer support.

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