Telefonica moves to cut AT&T link

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The Independent Online
Telefonica, Spain's main phone company, yesterday moved closer to severing its alliance with AT&T of the US after British Telecom's landmark deal last week to poach the carrier into a partnership with MCI, its American partner.

Juan Villalonga, Telefonica's chairman, confirmed that the company was likely to leave Unisource, the four-way alliance of European carriers in which it had a 25 per cent stake. Unisource also has an alliance with AT&T, which competes for large European business customers with BT and MCI's offering, Concert Communications Services.

BT's deal to prise Telefonica out of Unisource has been regarded as a huge coup for the UK giant's international strategy. Telefonica is the world's ninth-largest carrier with by far the largest network of interests in the rapidly expanding Latin American phone market. It has controlling stakes in phone networks in Chile, Peru and Argentina. Under the deal BT will buy 2 per cent of Telefonica shares later this year for about pounds 280m, while Telefonica will buy 1 per cent of BT. The arrangement needs approval from the European Commission.

Mr Villalonga insisted the withdrawal from Unisource would be orderly. "We will start negotiations and since we have a good relationship there will be a deal soon." Facing criticism in the Spanish press that the latest deal brought Telefonica under the control of BT and MCI, he added: "This alliance is an opportunity and not a threat."

The discussions will now centre on financial penalties Telefonica could have to pay to leave Unisource. One issue is whether the Spanish carrier would have to buy back the data transmission network it injected into the Unisource alliance on joining.

Mr Villalonga said he would "recover" the network, which Unisource uses to distribute its communications services and which is said to be worth up to pounds 300m. However Unisource made clear it does not intend to give the asset away free.

Separately, Unisource sought to limit the damage to its ambitions, insisting that the grouping was "well and thriving," even without the involvement of Telefonica.

The remaining shareholders are PTT of the Netherlands, Swiss Telecom and Telia of Sweden.

AT&T yesterday revealed a further drop in profits, which have been under mounting pressure due to stiff competition in the US long-distance phone market from rivals MCI and Sprint. Profits between January and March slid 17 per cent to $1.13bn (pounds 706m), though turnover grew to $13.05bn.