MCI and British Phone Giant Explore Merger
In what would be the largest takeover of a U.S. company by a foreign buyer, MCI Communications Corp. and British Telecommunications said Friday they are discussing a merger and could announce a definitive agreement as early as Sunday.
The deal, in which BT would pay as much as $22 billion for the 80% of MCI it does not already own, would create the world’s fourth-largest telephone company. But the proposal faces regulatory and legal hurdles that could delay its completion by a year or more--or derail it altogether.
If consummated, the merger would create an integrated telecommunications company with 20% of the U.S. long-distance market, commanding shares of the British residential and business phone markets, and interests in satellite communications and regional and national phone networks around the world.
While U.S. consumers would see little immediate impact, a BT-MCI combination could eventually yield more aggressive competition--and possibly lower prices--in local and international phone service.
The merger would spell the end as an independent company of MCI, which took on the monopolistic AT&T; Corp. in one of the great competitive success stories in American industrial history. MCI is now the nation’s second-largest long-distance carrier and has been trying to push into new markets, including local phone service, the Internet and satellite television.
Analysts say a merged company would have efficiencies and capital resources that would improve its chances of prospering in an industry that is becoming relentlessly competitive. Telecommunication services have been deregulated in both companies’ home countries and are also being thrown open to competition on a more limited basis across Europe and in the surging economies of Asia.
BT, in fact, is the successor to the once-derided British government telephone monopoly. The company was spun off as a publicly traded company during the aggressive privatization campaign of former Prime Minister Margaret Thatcher. The company, which controls 90% of the residential phone market in Britain and half the business market, has since transformed itself into an aggressive competitor.
Deregulation efforts around the globe have created a worldwide communications market worth as much as $500 billion a year--but demanding billions of dollars of investments in new technologies, such as satellites and wireless transmission systems, as well as in physical communications lines.
“The guys who lead the industry are absolutely firm in their belief that bigger is better,” said Peter Bernstein, an analyst at Infonautics Consulting of Ramsey, N.J. “We live in an era when no merger or acquisition is beyond the realm of possibility, given how enormous the stakes are.”
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The BT-MCI deal would be the fourth major telecommunications merger announced this year, following the $17-billion merger of SBC Communications Inc. and Pacific Telesis; the $22-billion merger of Bell Atlantic Corp. and Nynex Corp., two East Coast Baby Bells; and the $14.4-billion deal in which long-distance provider WorldCom Inc. bid to buy MFS Communications Co.
The mergers were driven in part by passage early this year of landmark telecommunications reform legislation designed to break down the competitive barriers among providers of local and long-distance telecommunications as well as those offering cable television service.
Analysts say the next round of deals could well include Sprint Corp., the nation’s third-largest long-distance carrier, which sold 10% stakes to Deutsche Telekom and France Telecom last year.
None of the previously announced mergers has yet earned final government approval, but a BT-MCI merger would raise unique regulatory issues. Not only would it be scrutinized for antitrust violations, it would also require special approval from the Federal Communications Commission under laws restricting foreign ownership of domestic telecommunications carriers.
The FCC last year loosened its traditional restrictions on foreign ownership, allowing overseas investors to acquire more than 25% of a U.S. communications company for the first time. That permission would only be granted, the FCC said, in cases where similarly liberal ownership rules exist in the buyer’s home country.
In the BT-MCI case, that means the FCC may have to determine whether British foreign-ownership rules would allow American buyers to acquire 100% of British communications companies.
That hurdle may not be difficult to clear; the British telecommunications industry is the “most open” in the world outside the U.S., said Scott Blake Harris, a Washington communications lawyer who formerly served as head of the FCC’s international bureau.
But MCI’s rivals, none of which relish competing with a financially stronger long-distance carrier, are sure to use FCC hearings on the issue as a device to stall approval of the proposed deal.
Indeed, AT&T; on Friday issued a preemptive warning.
“We would expect that our government would condition any such merger on the complete and unqualified opening of the telecom market in the United Kingdom,” said AT&T; spokesman Jim McGann.
For its part, the FCC said Friday that it would look for evidence that “effective competitive opportunities” exist for U.S. companies in Britain, in the words of Diane Cornell, chief of the telecommunications division of the commission’s international bureau. As long as that determination is made, she said, “we can waive the [ownership] rule if we think it is in the public interest.”
Analysts said the BT-MCI merger appeared to make sense for both companies in details large and small. BT would gain an important foothold in the U.S. market, which is not only the richest local-phone market in the world but also the largest hub for international calls.
It might also gain a cherished entry into the satellite TV market via MCI’s $2-billion investment in Rupert Murdoch’s News Corp., the owner of the BSkyB satellite TV service.
MCI gains not only financial strength but also better access to international markets.
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As far as U.S. domestic competition is concerned, many industry observers and consumer advocates said Friday that they view a BT-MCI merger as a better deal than a merger of two domestic companies.
“MCI may well have been vulnerable to takeover from one of the Baby Bells, for instance,” said Mark Cooper, research director for the Consumer Federation of America, noting that a purely domestic merger would reduce competition and tend to raise service prices for American consumers. “In that sense, this would preserve MCI as a domestic actor.”
Word of the impending transaction came Friday in similar but separate statements from both companies, saying they were in talks aimed at a “possible strategic merger” with the other. The companies cautioned that they might still fail to reach a final agreement.
Terms of the prospective deal were not disclosed, but most speculation focused on a merger in which BT would buy the 80% of MCI it does not already own. If that takeover took place at $40 a share--a hefty but reasonable premium over MCI’s market price--the transaction would cost about $22.1 billion. Sources at MCI said a formal merger announcement could be made as early as Sunday in the U.S., before trading in BT stock opens Monday in London.
MCI shares soared $5.125 to $30.25 on the Nasdaq market before trading was halted for the weekend at 1:27 p.m. EST. In what could prove to be an embarrassment for Nasdaq officials, however, as many as 500 trades were reported after the halt. Market regulators are looking into whether any of those trades actually took place after the halt, which would be a violation of exchange rules.
The American depositary receipts of BT closed at $55.50, down $2.125, in New York Stock Exchange trading.
Hiltzik reported from Los Angeles and Shiver from Washington. Times staff writer Scot Paltrow in New York and correspondent Karen Kaplan in Los Angeles also contributed to this story.
* INDUSTRY MAVERICK
MCI shook up long-distance field but needs help. D1
* EFFECT ON CONSUMERS
Deal would hasten MCI entry into local phone business. D1
