BT widens investigation into MCI's prospects

British Telecom's review into the business of its US partner, MCI, has become much wider than previously thought, the UK group indicated yesterday, as executives again refused to say whether they had the power to renegotiate the planned $20bn (pounds 12bn) merger.

But BT faced renewed criticism from analysts when it revealed much better than expected first-quarter profits. One analyst accused the company of "a blatant fiddle", by temporarily slashing its redundancy costs.

Sir Peter Bonfield, BT's chief executive, said the review would include all aspects of MCI's operations and of the merger terms themselves. BT launched the investigation a fortnight ago after MCI plunged the merger into jeopardy with a shock profits warning.

The US long-distance operator said losses this year from its drive into local phone markets would reach $800m, double the level previously forecast. Sir Peter and BT's finance director, Robert Brace, have recently returned from a fact-finding trip to MCI's Washington headquarters.

"The review is a wide review of the situation. The market place is changing rapidly.... We are looking at all aspects of the deal," said Sir Peter. Figures this week added to MCI's woes by showing a slowdown in growth from its main long-distance operation.

Sir Peter reiterated MCI's comments this week that the review would conclude in "weeks rather than months" and possibly by the end of August. BT's big shareholders have demanded information much sooner.

But he would not be drawn on whether the merger agreement allowed BT to renegotiate the terms, short of pulling out altogether. "This is a complex agreement interpreted by lawyers," Sir Peter added.

Last night there was growing speculation among analysts that the merger terms included a secret clause specifically banning renegotiation on the grounds of a deterioration in MCI's local business. In a separate briefing Sir Peter would only say some clauses of the agreement were "not public" and BT "has not publicised them".

Sir Peter also appeared to distance BT from MCI's bullish attack on the local market given by US executives this week. He said the "mutual review" would decide whether this strategy, which would raise investment substantially, was right. "Do they spend more, do they spend less?" said Sir Peter.

Responding to growing criticism from UK shareholders, Sir Peter admitted the events had dented the board's credibility. Asked whether British executives would be forced to resign, he continued: "I am employed at the pleasure of the board and nobody is denying me that pleasure. But I'm not a quitter."

BT also ruled out raising its pounds 2bn special dividend of 35p a share, to be paid in September before the merger goes ahead, as a way of reducing the price for MCI. Investors in the US group will be paid partly in BT shares, but the UK company's share price would drop after the dividend has been paid out. A higher dividend would reduce the value of BT shares to MCI investors.

BT reported profits of pounds 881m between April and June, a 1.4 per cent increase on last year. But the figures were boosted by a drop in redundancy charges from pounds 52m to pounds 16m.

One analyst said last night: "They've been telling us the redundancy charge for this year will be about pounds 200m. Prudency dictates they should be taking a charge of around pounds 50m each quarter. But to continue with the bid for MCI they need to support the share price as much as possible by making the results look better than they really are."

BT shares closed at 426.5p, down 4p.