Dragon casts shadow over BT's dream merger
Sunday 31 March 1996
BT's planned pounds 35bn merger with Cable & Wireless, whose jewel is its majority stake in Hongkong Telecom, has been greeted with near universal approval in the City. The fact that the Chinese take control of Hong Kong in 15 months has hardly registered.
Surprisingly little has been made of the political risk. Every telecoms watcher is bogged down in the arithmetic of the likely terms of the deal, or is speculating on which parts of the merged entity will have to be sold off to make the deal palatable to the Government and to the telecoms watchdog, Oftel.
There is an irony here. BT is desperate to expand the non-regulated side of its business. It is no fun operating in an environment in which you have to cut your prices by 7.5 per cent every year. Hence the emphasis on international growth. But by piling into Hong Kong, BT may find life every bit as regulated as it is back home.
Come July 1997 it will be a supremely restrained Chinese government that doesn't feel impelled to meddle in an industry as strategically important as telecommunications. And nothing in its recent record - from Tiananmen Square to the Taiwan Straits - suggests China is big on restraint.
Buying an asset in Hong Kong is not the same as buying it in America or Europe, and BT should be aware of that fact. C&W may be described as an Asian telecoms giant, but virtually all its operations and the vast bulk of its profits are concentrated in Hong Kong. It is absurd to suggest that this single deal would transform BT into the world's first truly global telecoms operator. At best it could prove a useful springboard into the fastest-growing economies in the world.
What it certainly would do is put a significant number of the enlarged BT's eggs in one basket. BT shareholders should be aware of the change. A deal could make BT a much more profitable organisation. It will certainly make it a much riskier and therefore more volatile investment.
From C&W's point of view, the advantages of a merger are more clear cut. It would resolve two ever more glaring problems. The first is the difficulty of coming up with a new strategy following the failure and confusion of its attempt to develop a "federation" of telecom alliances.
The second is the management vacuum created by the abrupt departures last year of its chairman and chief executive, Lord Young and James Ross respectively. There is little doubt that BT's two chiefs, Sir Iain Vallance and Sir Peter Bonfield, would take the helm of the enlarged group. There would be no need to find new bosses at C&W.
The regulatory hoops are difficult but not impossible. C&W's 80 per cent stake in Mercury Communications would certainly have to be sold off. But there are a number of prospective buyers. The US giant AT&T heads any bidders list, followed by GTE and several of the regional US operators. Deutsche Telekom from Germany and KPN from the Netherlands could also be interested. A combined BT/C&W would have to jettison some of its mobile phone assets. Germany, where both companies have operations, could be another headache. But none of these regulatory problems looks insurmountable.
The crunch will be to agree a price. The two sides have abandoned talks once before after failing to agree terms. The fact that their advisers are meeting again suggests that someone has given ground. The danger is that BT, whose share price has been weak recently, will be persuaded to give too much away.
This is a deal that C&W needs much more than BT. The terms should reflect that. BT should drive a very hard bargain, or walk away.
Uneasy peace at B&Q
IT WAS the sacking that never was. Everyone expected Jim Hodkinson, chief executive of B&Q, to be relieved of his tool-kit in the wake of last week's disappointing results. As far as I can ascertain, he has been at daggers drawn with Sir Geoff Mulcahy, head of the parent company Kingfisher, for months. Hodkinson was the only subsidiary head who failed to meet Mulcahy's tough performance criteria. B&Q profits have slumped. Underlying sales are flat.
Moreover, there has clearly been a difference of opinion on strategy. Hodkinson wanted to roll out aggressively the new warehouse format of B&Q stores - huge sites of 100,000 sq ft or more. This was despite a worsening in the overall DIY market and growing evidence that the warehouse stores were "cannibalising'' trade from B&Q's ordinary supercentre stores.
The two men seem to have patched up their differences at the last moment. The cautious Mulcahy has got his way: the roll-out of the warehouse format has been sharply scaled back.
I'm not convinced the peace will last. The relationship has never been perfect. In 1992, Hodkinson was pushed sideways, away from the core job of running B&Q. In 1994 he actually quit, only to return to the fold a few months later.
What is next, then, for B&Q? Spring has sprung and the next few weeks will be crucial for all DIY/gardening product businesses. The industry continues to suffer from overcapacity and margins are wafer thin.
One theory gaining currency is that Boots and WH Smith will bite the bullet on their disastrous Do It All chain, selling the few strong sites and closing down the rest. That would be good news for B&Q and for Sainsbury, which is busy absorbing the Texas chain - bought from Ladbroke - and is finding it harder than it anticipated.
It looks, however, like wishful thinking. True, WH Smith, under its new boss, Bill Cockburn, looks more than happy to take the inevitable pain. But Boots does not. It can afford to soldier on, comfortable in the knowledge that its cash cow, Boots The Chemist, can easily finance any losses at Do It All.
Its thinking is more likely to be: why throw in the towel now just as the housing market - the biggest influence on DIY purchases - looks as if it is perking up? DIY retailers should not be relying on Do It All to make life easier for them.
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