C&W steps in to sign up German partner

Cable & Wireless is to join forces with giant German utility RWE to develop its German telecoms business, the companies announced last night. Preliminary agreement was reached following the collapse of BT's much-vaunted German alliance with RWE, leaving BT to develop a separate strategy in the giant market, scheduled for deregulation from 1998.

Under the agreement, reached in principle yesterday, C&W will own 22.5 per cent of a joint venture, grouping Vebacom, C&W's partnership with Veba and RWE's telecoms operations. The new group will have a service and network company, operating separately, with RWE contributing net cash of approximately DM2.5bn (pounds 1.05bn).

C&W, which owns the Mercury telecoms company in the UK, would be refunded DM450m, because the alliance would be "substantially over-capitalised" with RWE's involvement, the companies said.

Richard Brown, C&W's chief executive, said: "This transaction underscores the value of our investment in Germany, materially reduces our exposure to start-up costs and will have a favourable impact on our earnings, cash and balance sheet."

BT said that "serious disagreements about strategy" had been behind the decision to end the joint venture plans with RWE. BT will continue to work with telecoms company Viag, its joint-venture partner in Germany, and said the two still planned to apply for the fourth mobile telephone licence announced by the German government, despite RWE's exit.

Explaining the collapse of the RWE-BT alliance, a BT spokesman said: "They wanted separate divisions for mobile and fixed-line networks, while we wanted to bring them together." He said RWE was keen to develop extensive infrastructure, while BT preferred a "service-based company".

He said the German expansion plans, which are seen as key to BT's global aspirations, would not cost more as a result of the collapse of the RWE joint venture. BT will step up plans to win access to fixed-transmission capacity in Germany.

BT said it would leave the door open to other potential partners to join with it and Viag. "It has always been our intention to bring in another partner," the spokesman said.

Under the complicated C&W-RWE deal, C&W will retain its 45 per cent interest in Vebacom, its joint venture with Veba. The network and services operation of Vebacom and those of RWE, called Rwecom, will be combined into two companies, one covering services and the other networks. Vebacom will have a 51 per cent shareholding in the services company and 49 per cent of the network company. In addition, Veba will take a 25 per cent interest in Rwecom.