View from City Road: BT bets big bucks on link-up with US group

Iain Vallance and his team at BT have chosen a dramatic way to underline the company's independence from the Government by announcing such a high-risk deal as the link- up with MCI in the weeks preceding the pounds 5.5bn BT3 float.

The dollars 1bn ( pounds 650m) joint venture with MCI to exploit the potentially lucrative and fast-growing global market for value-added telecommunications services looks attractive. But the dollars 4.3bn purchase of a 20 per cent stake in MCI at a 25 per cent premium to its stock market price is likely to be a drain on BT's finances for some time.

Most important of all, the link-up puts BT squarely in the firing line of AT&T, the world's biggest telecommunications group. The US giant has already had its share of legal scraps with MCI, the first to crack its monopoly in 1968.

Investors can be forgiven a sense of recall about the MCI deal. Once upon a time BT had a two-pronged strategy to expand overseas to escape the cruel clutches of Oftel, its UK regulator. Premium services for business were the key.

One avenue was mobile telephony. BT bought a 20 per cent stake, later increased to 22 per cent, in McCaw Communications, the biggest US cellular phone operator, for a princely dollars 1.37bn back in 1989. But the avenue became a cul de sac and BT was thankfully rescued by AT&T which bought the stake last year at a price that allowed BT to retire unhurt.

The second international avenue was value-added network services or Vans. Large multinational companies are crying out for sophisticated telecommunications services combining voice, data transmission, multi-media facilities and virtually private networks.

Pooling its existing Vans projects in a 75 per cent-owned joint venture with MCI gives BT access to a huge range of state-of-the-art telecommunications and a presence in the US, where 40 per cent of multinationals have their headquarters, obviating the need for a federal licence.

But a price has been exacted and that is the investment in MCI. Gearing will jump from 14 per cent at the end of March to over 40 per cent although receipt of the McCaw proceeds would cut this to 30 per cent. Dividend income from MCI is minuscule and financing the share stake could cost pounds 100m a year. However, the technique of equity accounting will disguise this and show no significant earnings dilution.

Against expected profits of pounds 3.1bn this year such sums are chicken feed. But the Government can consider itself lucky in the circumstances to see BT shares down only 5p to 421.5p.