Cable & Wireless last night ended weeks of speculation by confirming that it was in talks with BT that could lead to a pounds 33bn merger of the groups and rewrite the map of the telecommunications industry.
The merger would also be by far the biggest ever in the UK, dwarfing last year's pounds 9.3bn marriage of the Glaxo and Wellcome drugs companies.
The company was forced into making a statement after the stock market had closed after a surge in its own and BT's share price in late afternoon dealings. The shares soared amid intense rumours that previous one-off discussions between the arch-rivals had finally been revived.
C&W said: "The board of Cable & Wireless noted the recent movement in the share price. Cable & Wireless confirms that some exploratory discussions are being held with BT which may or may not lead to a merger of the two companies. A further statement will be made if appropriate although there is no immediate expectation of this."
BT has consistently refused to comment in recent weeks, but City sources say an approach was made to Cable & Wireless at the end of last year after the abrupt departure of both its chairman and chief executive.
Sir Iain Vallance, BT's chairman, is believed to be determined to acquire C&W but it is unlikely that anything could happen without the agreement of C&W and the blessing of the Government. The merger - with appropriate conditions - is unlikely to be resisted by ministers.
Any deal between BT and C&W would face formidable regulatory hurdles in Britain and Hong Kong, where C&W's most valuable asset is based - its 57.5 per cent stake in Hongkong Telecom. The merger would also encounter difficulties in Germany, where the two companies have stakes in rival telecommunications groups.
The merger would be the biggest in UK corporate history and would almost certainly involve the sale of Mercury Communications, C&W's UK arm and the main rival to BT. Don Cruickshank, the industry watchdog, said recently that the main issue for him in the event of any merger and subsequent disposal of Mercury would be the strength and commitment of the new owners.
The plan would also have to include a solution for Mercury One-2-One, C&W's mobile joint venture with US West, which competes with BT's Cellnet. There was speculation yesterday that BT might in some way hive off its 60 per cent stake in Cellnet, the balance of which is owned by Securicor.
Shares in C&W climbed 34p during the day to 511.5p, valuing the company at pounds 11.3bn, while BT's rose by 14.5p to 348.5p, a valuation of pounds 21.9bn. The surge spilled over to Wall street. American Depository Receipts in BT rose by more than $3 to $54.25 and C&W by $3 to $243/8.
The negotiations at C&W are being conducted by Rod Olsen, acting chief executive and Brian Smith, non-executive chairman. The group has been actively attempting to recruit a new chief executive and an announcement had been expected within days. The talks with BT appear to have inevitably muddied the waters and C&W declined to comment on any potential management changes.
The driver for BT in acquiring C&W are its international activities, in particular the Hong Kong telecom stake and other operations in the Asia Pacific region. Sir Peter Bonfield, BT's new chief executive, has said within recent weeks that Asia Pacific is one region where BT must expand to ensure its future as a leading global player.
Any deal between BT and C&W would face tough regulatory hurdles in Hong Kong. It could also face difficulties in Germany, where the two companies have stakes in rival telecommunications groups.
BT is keen to expand outside the core UK operations which are increasingly squeezed by regulation and competition. The company's prices are at present capped at inflation minus 7.5 percentage points and are being reviewed now by Mr Cruickshank. The watchdog's proposals for new price controls are expected to culminate in a tougher cap to come into effect next year. BT must agree the changes decided by the regulator or the matter will be referred to the Monopolies and Mergers Commission.
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