Latest developments on the BT/MCI merger [NYT]

Rohit Khare (
Fri, 22 Aug 1997 01:49:36 -0400

[my oh my... the stock is at 30 now; the 52-week trading range is 23-43; it
was at 43 just after I joined; infer what you will :-]

[For the record, the current terms of the deal are 1 MCIC = .54 BT US ADRs
+ $6]

August 22, 1997

British Deal to Buy MCI Is in Disarray

CI Communications Corp. cleared the last regulatory hurdle to its $23.4
billion merger with British Telecommunications PLC on Thursday, winning the
approval of the Federal Communications Commission. But that news came
barely 12 hours after MCI stunned Wall Street with an ominous disclosure
that it might revise the financial terms of the deal.

"There can be no assurance as to the outcome of the discussions," said a
statement from MCI that held open the possibility of everything from the
deal's collapsing to its going through unscathed.

Though many analysts predicted that MCI and British Telecom would salvage
the merger, the contradictory developments left many observers baffled
about what would happen next at MCI, the United States' No. 2 long-distance

"It's amazing to me that they can come out with a statement that is so
open-ended," said Frank Governali, an analyst at Credit Suisse First
Boston, who, like most experts, had predicted that British Telecom and MCI
would close the deal on time, despite a deterioration in MCI's finances.

Now, about the only thing the analysts agree on is that if British Telecom
ends up buying MCI, it will pay from 10 percent to 25 percent less for the
company than the original terms of the deal. That consensus sent MCI's
shares into a deep swoon Thursday -- knocking $3.4 billion off the
company's market value in one frantic trading session.

The dizzying chain of events seemed to leave MCI's executives with a case
of vertigo, too. Shortly before noon Thursday, the company announced that
the FCC had approved its merger -- only to retract the statement minutes
later when it became clear that the FCC had made no such announcement. The
commission finally did approve the deal an hour later.

MCI's trans-Atlantic soap opera with British Telecom began on July 10, when
MCI warned its shareholders that it was running up unexpectedly large
losses as it tried to break into the local phone business. The company said
those losses could reach $800 million in 1997 alone.

That disclosure caught British Telecom's top executives off guard, and
angered some of its major shareholders, who thought they were paying too
much for an American phone company with mounting financial problems.
British Telecom's chief executive, Sir Peter Bonfield, flew to MCI's
headquarters in Washington and demanded an accounting for his new partner's
investment plans.

Executives at British Telecom raised the issue of renegotiating the deal
almost immediately, according to executives with knowledge of the company.
But lawyers for MCI said that would be risky because if the companies
tinkered with the terms, they might have to resubmit the deal for approval
by regulators.

Sir Peter and other British Telecom executives conducted a lengthy
investigation of MCI's business plans. That culminated in a marathon
meeting on Wednesday in Washington that ended late Thursday with the
decision to reopen negotiations on the terms of the deal.

British Telecom informed its board members of the decision at a meeting
Thursday in London. MCI's chairman, Bert Roberts, and its chief executive,
Gerald Taylor, participated by video conference.

Executives familiar with MCI still contend that a wholesale revision of the
merger could provoke the regulators to demand another look at the deal. But
a simple reduction in the price British Telecom pays for MCI may fall short
of the kind of change that would concern regulators.

Indeed, on Thursday the chairman of the FCC, Reed Hundt, said the financial
squabbling had no effect on the commission's approval of the deal. "We
don't micromanage the investment plans of telephone companies," Hundt said.

The merger of MCI and British Telecom has already been approved by
shareholders of the two companies, by the Justice Department and by the
European Union. But a standoff between the leaders of the two companies
over MCI's value could still unravel the accord.

"In light of the downturn in MCI's business, the deal looks extremely
expensive for BT," said Daniel Reingold, an analyst at Merrill Lynch & Co.
"It appears that BT is negotiating very hard, and MCI is getting realistic
about what it can expect."

British Telecom's get-tough stance cheered its shareholders. The company's
American depository receipts rose $4.375, to $66.375 Thursday, while MCI's
shares plummeted $6.125, or 16.7 percent, to $30.5625, in trading on the
Nasdaq, where it was the day's most actively traded issue.

Reingold said the companies would probably still struggle to complete the
merger because it offered compelling strategic benefits. Equally important,
he said, the companies have no stomach for the years of litigation that
would inevitably follow a splintered deal.

The trouble is, the negotiations to revise the deal are themselves
divisive. And MCI's relationship with British Telecom is already frayed.
Executives familiar with MCI said British Telecom had already pushed to
scale back MCI's entrance into local phone service and to remove senior MCI

A spokesman for MCI, Frank Walter, denied a report in Thursday's Financial
Times that British Telecom may force MCI to lay off up to 5,000 employees.
But he declined to comment on whether MCI would retrench in local service.

Another executive with knowledge of the company's plans said MCI would be
more targeted in its expansion into local markets. Such a strategy could
reduce MCI's losses from the estimated $800 million.

Even if MCI and British Telecom salvage the merger, these midsummer
problems could damage more than MCI's share price. The investment advisers
to the companies, who structured the original deal, will come in for sharp
questioning. And British Telecom's executives could come under scrutiny
from shareholders for failing to adequately investigate MCI's spending plans.

"You've got to wonder how deeply they looked into the costs of the local
phone business," said Scott Wright, an analyst at Argus Research. "There
will be more than enough egg to go around for everybody's faces."

Rohit Khare /// MCI Internet Architecture (BOS) ///
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