BT to send in MCI hit team

BT is planning sweeping changes at MCI in a bid to salvage its $20bn (pounds 12bn) merger with the US telecoms giant.

The deal, which was struck last year and is due to come into force in the autumn, has had to be rethought in the wake of MCI's announcement that losses on developing the $100bn US local telephone markets are spiralling out of control.

BT has been warned by shareholders that it cannot proceed with the deal without making big changes. While some analysts are calling for BT to abandon the merger, shareholders are insisting that the company presses ahead.

Senior BT personnel have been hurried into an MCI task force to scrutinise both the finances and the strategy behind the US company's floundering efforts to break down local telephone monopolies.

BT is prepared to redraft the current strategy and inject its own personnel into senior positions at MCI ahead of the merger. The task force is also attempting to unravel MCI's finances to assess how losses were able to soar out of control unnoticed.

The company will only proceed with the deal if it can demonstrate that it can secure an adequate return on its investment.

Long distance US telephone companies, chiefly AT&T and MCI, were granted the right to serve local telephone areas last year. Initially, MCI expected to run up losses of $400m in the first year. But late on Thursday it disclosed that losses were expected to be double that - about a third of MCI operating profits of $2.3bn last year.

The sleepy US local telephone operators, known as the "Baby Bells", who each have their own natural local monopoly, have put up a stiff rearguard action.

MCI tells of regional telcos deliberately "screwing up" agreements to provide compatible software. South Western Bell, in Texas, has had a switch available to route calls for MCI for many months, but few have actually been sent through it.

"These profit warnings reflect the delay in opening local loop competition in US, and the perception that cracking open these monopolies will be a lot tougher than expected," said Marco Fasoli, a principal at Boardview Associates, a US investment bank specialising in telecoms and media.

"But there is no question that the strategic rationale is right for BT; the deal gives it access into the largest market in the world. But it looks as if it will be more expensive than expected. The current terms could be altered, although there is not huge room for manoeuvre." Copyright: IOS & Bloomberg