Rival bid shoots down pounds 13bn BT/MCI deal
Thursday 02 October 1997
WorldCom's all-share offer, which came out of the blue yesterday morning, was almost 30 per cent above the value of BT's revised bid for MCI. Neither BT nor MCI had been given any advanced warning about the move, which threw the two companies into turmoil.
In a brief statement last night BT said it had been notified of the offer from WorldCom and was "considering the issues it raises," but offered no further comment. BT's only hope of salvaging the merger was the unlikely prospect that MCI's shareholders would prefer the UK group's lower offer, on the grounds that it included about $4bn in cash, compared to the all- paper bid from WorldCom.
A source close to BT dismissed WorldCom's approach as "mischief making" and insisted the company's ambitions remained intact. "We are still working to complete the deal by the end of the year. MCI's shareholders would get pieces of paper and a promise."
BT's executives, led by Sir Iain Vallance, chairman, and Sir Peter Bonfield, chief executive, were said to be "unfazed" by the bid. The company's board did not meet yesterday and was unlikely to do so until MCI's board discussed the rival offer.
MCI in Washington was equally guarded about the bid, releasing a statement that its board would meet "in due course" to review "all issues and options". The three BT executives on the MCI board, including Sir Peter, would attend the meeting but would not be able to take part in any vote.
Sources close to the MCI camp were less keen to dismiss WorldCom's approach. "They are very thorough and they have an excellent image in the US. They've acquired more companies than anyone else in the industry and they've never failed. It's difficult to discount anything at this stage," said a source.
If MCI fails to recommend the new bid to its investors, it would still have the opportunity to veto BT's lower bid at an extraordinary meeting planned before the end of the year.
BT revealed the renegotiated merger terms with MCI in August, cutting more than 20 per cent off the price of its offer for the 80 per cent of MCI it does not own. The price cut came after MCI stunned investors with a profits warning in July, predicting that losses from its move into the local US phone market would double this year to $800m.
Big shareholders in BT yesterday ruled out any move by the company to raise its offer for MCI to match WorldCom's. "When they got in with MCI originally the price was wrong. We were prepared to put up with the renegotiated price, but we'd find it very hard to accept them going higher," said one institution.
Jim McCafferty, an analyst with stockbrokers Hoare Govett, added: "BT will have to walk away from MCI. There's no way BT can make a higher offer for the company. Shareholders would just never accept that."
BT shares surged 32.5p on the news, with some investors welcoming the chance for the company to extricate itself from the link-up with MCI.
At a New York press conference peppered with jokes, Bernard Ebbers, the WorldCom president, said he would offer BT a seat on the board of the new company, in which it would end up with a stake of about 10 per cent.
Mr Ebbers said WorldCom's bid made better sense than BT's, because the company's existing local networks meant MCI would spend less on its investment programme. The combined group would make savings of $2.5bn in its first year, compared with the pounds 1.5bn savings estimated by BT over five years.
"We can realise far greater synergies than BT can. They don't live here," Mr Ebbers exclaimed. "BT and MCI are both great companies, but the fit just isn't right between them."
He said he was confident the deal would be completed by the first quarter of next year. BT's merger with MCI was due to go through at the beginning of January, having cleared most regulatory hurdles in the US.
WorldCom also claimed yesterday that MCI would not have to pay penalty fees of $450m to BT, which would be activated if its US partner pulled out of the merger.
In a letter to Bert Roberts, MCI chairman, Mr Ebbers said the clause would not be triggered if MCI's shareholders had exercised their right to vote against the merger with BT.
The rise of WorldCom - and of its share price - has been meteoric. Begun in 1983 by Mr Ebbers, who was previously in the hotel business, its revenues rose from $1m in 1984 to $5.6bn last year. The $14bn merger last year with MFS combined WorldCom's long-distance customers with a local network serving more than 50 US cities.
Yesterday WorldCom continued its expansion with another agreed deal to buy Brooks Fiber, a local phone company, for $2.4bn. It would boost the number of city phone networks owned by WorldCom to 86.
As Mr Ebbers was keen to point out yesterday, WorldCom's shares have dramatically outperformed rivals. He said a $100 investment in the company in 1989 would have yielded $3,137 today, compared with $190 for BT.
Leaving onlookers in no doubt about WorldCom's ambitions, Mr Ebbers hinted that he recently approached AT&T about a buyout but had not been taken seriously. He added: "After we have got a deal finished with MCI, we might acquire BT."
Outlook, page 23
International strategy in ruins as BT 'is saved from itself'
The stunned silence from BT's headquarters was hardly surprising yesterday, as Sir Iain Vallance, chairman, woke to find the company's international strategy in ruins.
Long-standing critics of the MCI link-up were jubilant, arguing that BT had been released from the $800m of losses its US partner would make this year from its drive into the $100bn local US phone market. It was this profits warning, in July, which enabled BT to slash more than pounds 3bn off the price of the deal.
James Dodd, from Dresdner Kleinwort Benson, and the leading City opponent of the merger, said: "This is a godsend. I can hear BT's shareholders cheering. An even bigger fool has saved BT from itself."
The rise in BT's share price yesterday partly reflected investors' relief. There was speculation that BT would be able to return billions to its shareholders in the form of share buy-backs, or further special dividends beyond the pounds 2bn already paid out this year.
Though big investors yesterday ruled out the possibility of BT raising its bid for MCI to match WorldCom's, they also mostly rejected the suggestion that the UK group could stand alone. Mark Lambert, from the US banking group Merrill Lynch, pointed to the slow growth in BT's domestic customer base. "Going it alone would give a short-term boost for the share price, but mean long-term decline. BT would end up as an overcapitalised utility," he said.
It was a similar logic which propelled BT into pounds 33bn merger talks last year with Cable & Wireless. The talks ended in failure, with BT blaming C&W's reluctance to strike the right price and C&W blaming what it claimed were intractable regulatory obstacles.
Two alternatives were emerging for BT last night. The first was to accept Mr Ebbers' offer of talks to forge a new grand alliance with the merged WorldCom-MCI. He made it clear that WorldCom wanted to continue with the Concert international joint venture, in which BT has a 75 per cent stake, which is set to earn revenues of $1bn this year.
"We're confident BT and MCI will come to the table to negotiate an agreement between all three companies. We would certainly welcome their participation on our board," Mr Ebbers said.
One fund manager speculated that BT could propose a three-way merger. "It would give them a seat at the party. They might be able to salvage an alliance out of it or something bigger."
The second possibility was a deal with another telecommunications group. Shares in C&W surged 33p to 560.5p on speculation that merger talks could be revived. Other possible partners suggested by industry watchers included a local US phone company, one of the ''Baby Bells'', or even AT&T itself.
Another leading investor insisted that BT's strategy was not as badly damaged as its pride. "There are still plenty of alternatives out there. BT shares are relatively cheap compared to other European networks. It's still an attractive catch."
- Chris Godsmark
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