TeleCity will need cash if Redbus walks away

Telecity, an internet hotel, said it was in merger talks with rival Redbus Interhouse but cautioned it would need to carry out a fundraising exercise if a deal did not materialise. TeleCity shares lost 20 per cent to 46.5p.

The company, which has suffered two profit warnings since its June 2000 stock market flotation, said it had received preliminary indications of support from certain key shareholders, but noted that "no assurances can be given as to the level of funding which may be available to the company". TeleCity has been pursuing a number of funding options in recent weeks.

While analysts saw the logic of a tie-up, they were divided on whether Redbus would be prompted to pull out of the discussions after TeleCity's funding problems had come to light.

"They [TeleCity] need cash but have good assets. Redbus, on the other hand, have cash but fewer assets," said one analyst who did not want to be named. At the end of March, Redbus had £78.8m.

Gareth Evans, an analyst at Investec Henderson Crosthwaite, said: "The risk would be that if they [Redbus] leave it too long, somebody else would step in and buy TeleCity. I don't think TeleCity's customers would let it go bust. Most certainly somebody would step in to try and shore it up because it's crucial to what a lot of telcos and internet operators do."

TeleCity is expected to provide a further update with its second-quarter figures due out imminently.