Strange bedfellows ready for marriage
City & Business
Sunday 03 November 1996
However, where there might have been clash there was complement. BT was already becoming more like MCI and MCI was becoming more like BT. When they met it was at a curiously natural fulcrum which contributed to the creation of a telecoms alliance that might be characterised as stability with attitude.
It is always tempting to be attracted merely by the size of a deal and a BT-MCI merger would most certainly qualify as being big by any yardstick. However, this deal has more to commend it than the mere creation of the world's second largest telecoms company. Crucially it gives BT access to the US market. That is the world's biggest, but more importantly it is also at the cutting edge of the technological developments that are transforming the way in which we communicate. BT may not be getting access to a local telecoms market (MCI's strength is in long- distance US domestic calls) but that is less important than being at the heart of the multimedia revolution.
The deal also has some simple financial attractions. Just by spreading increased revenues over a smaller cost base there are natural benefits. It also shifts the balance of BT's business significantly away from the UK where the regulatory framework does not lend itself naturally to exciting growth. However, it is the intangible benefits of a comprehensive partnership that are more intriguing.
Already, through the Concert joint venture, BT and MCI have shown how effectively they can work together. In three years it has built a business which has 2,500 corporate customers and generates revenues of more than $1bn. Concert focuses purely on providing a one-stop service for multinationals. Imagine what a fully-fledged merger might achieve.
As BT has discovered in the past, the easiest part is to state an intention to merge. Completing the deal is altogether more complex. There are plenty of hurdles still to be cleared, both financial and regulatory. There is no doubt that AT&T will be more vociferous than it was when BT first acquired its MCI stake. The question of BT's closer ties with Rupert Murdoch's News Corporation also has to be addressed. The benefits of a BT-MCI deal are apparent, but we may have to wait some time before they are allowed to emerge.
It is hard to assess whether CalEnergy, the US power company which is bidding pounds 766m for Northern Electric, is either confident or complacent. Neither is a particularly appealing attribute and both expose the Americans to a dangerous tendency to believe that they have already won the bid battle.
It is easy to see where this virtual unreality comes from. Having sounded out the Northern board about an agreed deal, CalEnergy clearly knows that there is a willingness to accept a takeover. It also knows that the defence cupboard, raided so extensively when Northern was fighting off Trafalgar House, is bare.
Furthermore, the worries about Labour's plans for a windfall tax on privatised companies and a general fear of a tighter regulatory regime make the sector unappealing to white knights who are also uneasy about the prospect of a contested bid.
Against this backdrop, a low sighting bid with the tantalising prospect of a modest increase to come can appear to be such a winning formula that the Americans might even believe they can wrap this up without having to worry whether Day 60 will fall on New Year's Day.
Unfortunately for the boys from Omaha, Nebraska, life is not that simple. The immediate rush from investment banks to try to find a white knight certainly reflects a natural desire to earn fees but also indicates a belief that Northern is not only a respectable target but that there are plenty of potential rivals.
Northern remains an attractive proposition for bidders at home and abroad. When the interim figures are published they will show that the scorched- earth defence used against Trafalgar has not undermined the fabric of the business. As either a toehold in the UK energy market or member of a new, cross-utility combine, it has all the right attributes. Political and regulatory risk cannot be ignored but neither should they be seen as new problems. They very much come with the job and do not change with a new administration.
Neither should a white knight be too concerned about the torment of a contested bid. The Nebraskans have indicated they want to play a low-price game either out of necessity or naivety. That will make it difficult for them to outbid a more generous agreed offer.
The chances of Northern retaining its independence are slim, but so too are the chances of CalEnergy having everything its own way.
Clarke stays ahead
One OF Chancellor Kenneth Clarke's great skills is his ability to orchestrate a coincidence of political and economic interests. He has done it again with last week's quarter-point hike in the base rate to 6 per cent. He has headed off an unseemly, disruptive and long-running battle with the Bank of England. The strike is the requisite pre-emptive assault on inflation and should be enough, aided by sterling's strength, to avoid a another rate rise closer to the election. The rate rise has not filtered through to mortgage rates and homeowners may find the news from the Nationwide that house prices are rising at 7.9 per cent, the highest since the Eighties boom, more enduring.
The question now is whether Mr Clarke can repeat the trick come the Budget in three weeks' time. His Wise People have advised against a giveaway Budget but his back-benchers like to believe that the interest-rate rise is ample justification for sweeping tax cuts. It is hard to see where the coincidence of politics and economics lies. But if anyone can find it, Ken can.
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