Spanish-Dutch merger talks threaten to freeze out BT

British Telecom's global ambitions suffered a severe setback yesterday when it emerged that Telefonica, the Spanish phone group, and KPN of the Netherlands were in talks that could lead to a 140bn-euro (£82bn) merger.

A deal between the two would create a new force in world telecoms, with fixed and mobile operations spanning Germany, Belgium and Latin America as well as Spain and Holland.

It would also put paid to long-standing City hopes that BT, whose share price has fallen 24 per cent since the start of the year, would itself merge with Telefonica at some stage.

In a joint statement after the markets closed yesterday, KPN and Telefonica said they were in merger talks with each other but insisted that the talks were "not certain to produce results."

KPN shares soared 10.65 euros to 121.50 euros yesterday after Spanish press reports at the weekend on a possible merger between the groups. Amsterdam was the only European bourse trading yesterday.

KPN was planning a 9bn-euro initial public offering for its mobile operation later this week, but on Friday delayed the listing because of talks with a strategic partner. It later confirmed that the partner was Telefonica.

Diedrik Karsten, chief executive of KPN Mobile, said: "We're in talks with a possible partner in such a way that [the] information must be in the [IPO] prospectus, but it can't yet be put there."

KPN is ambitious to grow its mobile phone operations. Last year it jointly bought control of Germany's E-Plus in partnership with BellSouth of the US. The group aims to become Europe's third-biggest mobile operator. Telefonica is also highly regarded by investors internationally. Its chief executive, Juan Villalonga, has embarked on a broad growth programme.

The group has launched a 21bn-euro tender to buy out minority shareholders in the clutch of Latin American telecoms companies it controls. The group recently floated off a minority stake in Terra Networks, now the biggest internet service not just in Spain, but in the entire Spanish and Portuguese-speaking world. Terra's market value is about 25bn euros.

Analysts say that Telefonica, because of its strong presence in the fast growing Latin American markets, has long been seen as an attractive merger partner for either a US operator such as MCI Worldcom or SBC, or a European operator such as BT or Deutsche Telekom. Surprisingly, few suggested that KPN and Telefonica were obvious partners, despite both having been involved in the Unisource group with US giant AT&T and the Swiss in 1994.

Telefonica took its first step into Holland last month with its 5.5bn-euro purchase of Endemol, the Dutch entertainment group. Telefonica is also one of the backers of the pan-European internet banking group Unofirst, which includes First-E in the UK.

KPN and Telefonica have expressed interest in bidding for Orange, the UK mobile operator Vodafone AirTouch is having to sell as a condition of getting EU competition approval for its takeover of German rival Mannesmann earlier this year.

A merger between Telefonica and KPN would intensify pressure for consolidation among the traditional telecommunications operators.

BT and Telefonica were both partners in the abortive three-way Concert deal with MCI Worldcom, which failed when BT called off its merger with MCI in 1997. Since then there have been many contacts in an effort to revive co-operation plans between the Spanish and UK operators, fuelling City hopes that Telefonica might bid for BT.