Bell Cablemedia to buy Videotron in $600m deal

A $600m (pounds 377m) deal heralding the biggest shake-up in the UK telecommunications market since deregulation could be unveiled as early as today, presenting a huge competitive challenge to BT's near-monopoly of telephone services.

Complex negotiations between Cable & Wireless and Bell Cablemedia continued over the weekend and late into last night, aimed at finalising the takeover of the cable operator Videotron and the merger of the combined group's telephony services with C&W's UK subsidiary, Mercury.

The deal is expected to involve Bell Cablemedia taking control of Videotron, in which it has 26 per cent stake. Cable & Wireless, which owns 13 per cent of Bell Cablemedia, is likely to expand its stake in the enlarged company and will secure Mercury direct access to hundreds of thousands of residential phone customers for the first time.

The move is a surprisingly swift demonstration of the strategy of C&W's recently appointed chief executive, Dick Brown, outlined to City analysts at a cocktail party six weeks ago. His priority was to give Mercury direct access to customers in the UK to prevent its share being squeezed by the expanding cable operators and BT.

Currently, Mercury lays cables only to large business subscribers with phone bills in the region of pounds 10,000 a year. Other smaller customers have to access Mercury using a special button on the handsets of their phones.

Indirect access meant the lucrative special dialling services offered by BT could not be provided and brought the inconvenience of two sets of bills.

An internal strategic review conducted by Mercury for Mr Brown over the past few weeks proposed a huge expansion into the so-called local loop, raising Mercury's annual investment from pounds 350m to around pounds 500m.

Trials have been conducted this year, laying cables to small businesses in Bristol and using fixed radio links.

However a much quicker route to wider coverage was always through the purchase of a UK cable operator. Videotron became the obvious target when its Canadian parent put the UK side of the business up for sale earlier this year.

The Anglo-Canadian company has invested around pounds 400m since the late 1980s, building up a cable network in the UK which covers affluent areas of west and south London and Southampton. A valuable prize is its two telephony- only cable franchises in Westminster and the City of London.

Combining Videotron with Bell Cablemedia would give Cable &Wireless access to a potential 1.5 million homes, second only to Telewest in the size of its coverage.

The challenge for C&W will be to raise take-up rates of the services, which are currently less than 300,000 for television and telephony.