WorldCom bid leaves BT strategy in tatters

US company's $30bn offer sends reverberations through the telecoms industry worldwide, writes Dawn Hayes

BT's bid to become a global telecommunications company, lies in shreds this weekend as the repercussions of WorldCom's $30bn (pounds 18.6bn) bid for MCI Communications reverberate through the telecoms industry worldwide.

WorldCom's move threatens to unsettle existing partnerships and recast an industry struggling to come to terms with a shift in its economic power base.

"The global alliances are always flirting with a big strategic problem," says James Dodd, telecommunications analyst at Dresdner Kleinwort Benson Securities. "It is clear that, pitted one against the other, they would force margins very rapidly down to cost."

The other key telecommunications alliances, whose strategies followed BT's and are also thrown into question, are Global One - a joint venture between Sprint and Deutsche Telekom and France Telecom - and AT&T Worldpartners, a partnership between AT&T and various traditional phone companies around the world.

Their aim was to offer global communications to multinational companies.

The potential breakdown of BT's relationship with MCI may also have a domino effect on BT's joint ventures with European companies, including Telefonica in Spain, Viag in Germany and Cegetel in France. Many of those ventures were created against the backdrop of BT's agreement with MCI.

When BT first thought of buying MCI in the early 1990s, analysts say, it was probably a good idea. It would have given BT direct access to the 40 per cent of the world's multinational companies that are based in the US.

But analysts say the bid by Iain Vallance, BT's chairman, to control the assets his company buys overseas and his aversion to minority stakes has scuttled the company's grand plan to become a global communications company.

Some former state monopoly telephone companies have been too keen on ownership rather than strategic alliances. They have also failed to keep pace with developments in technology that make local networks the high- margin earners that international services used to be.

BT's shareholders believe it must now use its 20 per cent stake in MCI to barter a minority place at the WorldCom/MCI feast and rethink what has become an outdated international strategy based on ownership. WorldCom may have done BT a favor by forcing the company back to the drawing board.

"BT has to use its stake in MCI in a proactive way to strike an alliance with the two companies," said Tony Hardy, an investment manager at the Church Commissioners. "They can swap it for WorldCom paper and take a stake in the new business."

Shareholders agreed that one thing BT cannot do is give up on building a significant presence in the US.

"Any international telecommunications company with major international ambitions can't ignore the largest market in the world," said John Hatherly, head of research at M&G.

Nor can BT go it alone in the US, because "they're too tiny there," said Mark Lambert, a telecommunications analyst at Merrill Lynch. Other possible partners for BT include GTE Corp, a US telecommunications company that has yet to establish partnerships with international operators but which owns extensive local and wireless operations in the US. The 7.6 per cent rise in Cable & Wireless's share price since Tuesday prompted speculation that previously aborted merger talks with BT may be renewed. BT could also link up with AT&T or with regional Bell operating companies in the US, including Bell Atlantic/Nynex. WorldCom's bid - the second problem to have caught BT by surprise this year in its plan to buy MCI - undermines the centrepiece of Mr Vallance's vision that BT must expand internationally to survive into the next century as competition and regulation ero des revenues at home. Observers say his vision is right but needs adjusting. It needs to control local infrastructure around the world, which allows it to control its costs and those of competitors who need to use it. "Vallance has got BT trying to do the right thing, but he could be criticised for being a little bit naive in dealing with MCI," said Mr Hardy. "But it seems slightly worrying that BT have again been caught flat-footed - their corporate advisers don't se em to be very well informed." "You could criticise them for not knowing MCI as well as they thought they did," added Mr Hatherly. "But you must give them marks for going back and renegotiating the deal." BT renegotiated the terms of the MCI purchase after the US company revealed losses it will incur this year for entering the US local market will be double original estimates of $400m. MCI's shareholders claim that was the mistake that allowed WorldCom to drive a wedge into the BT/MCI agreement. "Frankly the UK investors are being way too short-sighted on this," said Scott Schermerhorn, at Federated Investors, the US investment fund that owns 5 million MCI shares. "I think BT ruffled some feathers with that renegotiation." Still, analysts and investors do not expect Mr Vallance or Mr Bonfield to quit. "This does knock a significant hole in BT's worldwide plans," said Mr Hardy. "We wouldn't vote for a renewed bid - we feel that in the short to medium term, it wouldn't be an advantage to BT shareholders." Neither BT nor MCI has said yet how it plans to respond to the WorldCom offer, which cannot be completed until October 1998 under an agreement between BT and MCI. Whether Worldcom needs BT for its own international presence is less clear. While international communications capacity has become a low-priced commodity, local network infrastructure is scarce and expensive. "It's the megabits to the individual that is the bottleneck and if you clear the bottlenecks, you make money," said a spokesman for WorldCom. The company bought MFS Communications last year and with it city-based networks serving business customers in London, Paris, Frankfurt, Stockholm, Brussels and Amsterdam. Construction is also underway in Zurich. The company said it will cost as little as $200m to link those city networks with a pan-European fiber-optic network. BT, meanwhile, has focused on building a global network, concentrating on European expansion as the European Union prepares to open all markets to competition in 1998. It has set up ventures with partners including Banco Santander in Spain, Viag Interkom in Germany, Banca Nazionale del Lavoro in Italy and Compagnie Generale des Eaux in France. Yet these ventures own little local-network infrastructure. WorldCom underlined its advantage last week, announcing in Amsterdam that it will set charges for communications services over its own local network at as little as half those of PTT Telecom, the dominant Dutch company. BT's joint venture with electricity companies in the Netherlands, called Telfort, has no local infrastructure and is dependent on prices set by PTT Telecom or WorldCom. "WorldCom is a stronger, more credible partner for BT in the US - they own UUNet, Compuserve, MFS, 92 Metropolitan networks and high connectivity for major corporates in US," said Mr Dodd. But he questioned whether WorldCom can continue the climb that has sent its stock price soaring by more than 40 percent this year.