Deutsche Telekom move on C&W confuses City

The possible pounds 35bn merger between BT and Cable & Wireless was thrown into confusion yesterday following reports that Deutsche Telekom, Germany's state telecommunications company, has made unofficial contact with C&W.

The German group moved to quash speculation that it plans to bid, saying that it is looking at a variety of ways of expanding its European interests.

Deutsche Telekom's finance director, Joachim Kroeske, said that ,while he did not rule out a bid for C&W, "I do not think a takeover of C&W by Telekom is necessarily the one that will happen. There are other possibilities."

His comments fuelled speculation that Deutsche is seriously considering the acquisi- tion of Mercury Communications, C&W's UK arm.

Mercury is BT's big rival in the provision of telephony service in Britain and would have to be divested if the merger goes ahead. BT is thought to view Deutche as one of the preferred bidders for Mercury. Other would- be suitors are said to include AT&T of the US, Italy's Stet, and a consortium of US-controlled cable companies.

City analysts believe that Deutsche has earmarked the UK as a priority but that the group would not bid alone. Deutsche has tailor-made partners in the form of France Telecom and Sprint of the US, which are already its allies in the Global One organisation.

Shares in C&W rose 9p to 535p amidst conflicting rumours over potential suitors. Neither BT nor Cable, which have confirmed they are in talks that could lead to a merger, was willing to comment.

At the same time the Chinese government appeared to hint for the first time that it is concerned about an effective takeover of C&W, which is the majority shareholder in Hongkong Telecom.

Without approval by the Chinese authorities, any planned merger between the UK groups would be still-born as Hongkong Telecom is a key motive in BT's desire to acquire the rival group.

Yang Xianzu, China's vice-minister for post and telecommunications, told delegates at a Hong Kong conference that he was concerned about the issue but refused to elaborate. He later said: "We do not have much information about the matter on hand."

Under present discussions between the companies, the potential merger would take the form of a reverse takeover by C&W. Talks are being conducted largely by advisers, with NM Rothschild acting for BT and Goldman Sachs for C&W.

City sources say that the move has the tacit blessing of the UK Government. However, Ian Lang, Secretary of State for Trade and Industry, recently took the unusual step of issuing a statement denying that any approval in principle had been given.

The merger, which could happen within weeks, would also be scrutinised by the industry regulator, Oftel. Don Cruickshank, director general, has said he would be concerned to see Mercury taken over by a over by a strong management commited to competition.