BT under fire for rebuffing £8bn offer to buy 'local loop' network

British Telecom is expected to come under pressure from investors to consider seriously a £8bn offer for its "local loop" network, after the approach was made public this weekend.

The debt-laden telecoms group had rebuffed the approach, which was first made in early May by Earth Lease, a consortium of finance houses. The group issued a statement yesterday confirming speculation that it had put the proposal to BT.

Industry sources suggested that BT's shareholders would want to know why the approach was never made known to them when the company was selling them a £6bn rights issue. One insider said: "If I were a BT shareholder, I'd want to know why they turned away £8bn .... Earth Lease can't figure out why they haven't entered into detailed negotiations."

Earth Lease is headed by two US banks, Babcock & Brown and Chancery Lane Capital. It also includes funding from the financial heavyweights Deutsche Bank, JP Morgan Chase and UBS Warburg.

An Earth Lease source said: "The offer was in cash and we made it clear that this could be implemented quickly."

In June, a month after the consortium put its proposition in writing, it had a meeting with Sir Christopher Bland, BT's chairman. At the end of last week, the consortium received a letter from BT saying it was not interested at this time because it was dealing with other strategic issues. The company is in the process of demerging its mobile arm.

BT would not comment yesterday. It is understood, however, that the company is "baffled" by the approach and does not take it seriously. Both sides accused the other of leaking the news over the weekend. Until now, the local loop was considered to be among BT's least attractive assets.

A telecoms source said: "What they are after is a highly-regulated business. It excludes the high-volume data-intensive long-distance stuff. That's the growth story. BT suspects people are playing games here."

The deal would see Earth Lease acquire BT's copper and fibre local loop access network in the UK, the so-called "last mile", and its associated 30,000-plus workforce. BT, and other telecoms companies, would pay a fixed fee each time they used the lines, which run from local exchanges to millions of homes. Formally, BT would still hold the customers and issue bills. Earth Lease would need to obtain an operating licence.

The move would help BT to reduce its debt mountain, which still stands at £16.5bn, and to put the local loop, a source of conflict with rival telecoms companies who also need to use it, in the hands of neutral third-party.

Earth Lease has estimated that BT's return on capital from the local loop is just 1 per cent and thinks it could do much better. The idea was conceived by Nicolas Lethbridge, an ex-Schroders banker who heads Babcock's London office, and Simon Gray, a telecoms expert at the firm. They brought in Ted Ammon of Chancery Lane, a former partner at the US private equity giant Kohlberg Kravis Roberts, who had the contacts to land the three banks providing finance to the scheme.

The consortium said in its statement yesterday: "Earth Lease remains hopeful that substantive talks with the senior management of BT will commence in due course."

The news of the approach came as it was revealed that Sir Richard Branson's Virgin Group plans to challenge BT in the fixed-line telephony market. Despite having sold its mobile operations this month to Royal Bank of Scotland, Virgin was reported to be planning to sell branded deals for home telephones, by using spare capacity on the telephone network.