MCI reveals new $1bn provision

Fresh doubts arose yesterday about the financial health of MCI, British Telecom's US merger partner, after it emerged that the long-distance telephones giant is to take a restructuring charge of up to $1bn (pounds 625m) later this year.

Detailing the renegotiated merger terms to analysts last Friday, Douglas Maine, MCI's finance director, confirmed that "rationalisation measures" were "under consideration". When pressed, Mr Maine said that the anticipated provision would be in the "hundreds of millions, rather than a billion".

The new provisions would be on top of the $800m that MCI is expected to lose on its assault into the local US phone market. These losses, double MCI's previous estimate, stunned BT's shareholders last month and triggered the review of the merger. One of the main concerns of BT's UK investors has been that MCI's ambitions will soak up revenues from its British phone business.

Though MCI had previously made references to a possible restructuring charge in its long-distance business, executives had not suggested a figure. Tim Price, MCI's president, also denied to the press conference that followed the analysts' briefing that the company was planning to cut up to 5,000 jobs.

It would be the second big restructuring charge made by MCI in just two years, coming on top of a mammoth $831m provision in October 1995. Of this $216m was related to reorganisation of sales operations, including 3,000 job cuts, with a $520m to cover write-downs of MCI's assets.

The new restructuring plans follow the sharp slowdown in growth in long- distance revenues, which have been the main driver behind MCI's success. In the second quarter of this year long-distance turnover rose just 4.7 per cent, compared with more than 10 per cent in the same quarter a year ago.

Analysts were also surprised yesterday by details of the revised merger terms, filed unexpectedly quickly with the US Securities and Exchange Commission. They showed BT no longer had the right to back out of the deal or renegotiate further.

In addition, BT had agreed to pay MCI $750m if its shareholders voted against the merger, on top of an existing clause where both sides offered to pay each other $450m should they be forced to pull out under exceptional circumstances. A BT spokesman also said reports from the US that Sir Iain Vallance, chairman, had privately offered to step down if BT shareholders rejected the deal were "completely untrue".

The revelations knocked 22.5p off BT shares yesterday, to 413.5p. The UK group is paying pounds 11.4bn for the 80 per cent of MCI it does not own in a cash and shares offer worth 20 per cent less than the previous deal.

James Dodd, telecommunciations analyst with Dresdner Klenwort Benson and a leading sceptic about the merger, said the terms remained "potentially disastrous" and urged shareholders to reject the deal. He continued: "We're now in the extraordinary situation where BT has agreed to pay MCI $750m if shareholders disagree with the British management. It's corporate governance gone mad."

However, large BT shareholders seemed relaxed about the new "lock-in" arrangements. "It's a reasonable compromise. The changes are more an issue for MCI than BT," said one.