BT and MCI Will Revise Merger Terms

British Telecom and MCI reached agreement Thursday night on a revised plan for BT to purchase the Washington-based long-distance telecommunications giant, at a price believed to be considerably less than the original $23.5 billion, according to sources close to the deal.

The compromise, to be announced at a briefing this morning, followed a tumultuous day of negotiations in London and Washington, as top executives from both companies sought to keep the deal from collapsing.

The new terms could not be confirmed, though analysts estimated that British Telecommunications would ask for a 10% to 15% reduction in the price it would pay for MCI Communications Corp.

The merger would be the largest foreign buyout of a U.S. company and would create the world’s second-largest carrier of international telecommunications traffic.

As MCI’s stock took a drubbing Thursday from investors worried about the future of the deal, the Federal Communications Commission stepped in and approved the merger several days sooner than expected--an unusual example of a government agency rushing to the aid of a U.S. company.

Any new terms would still need the approval of each company’s shareholders. The changes would not be of the nature that would require the FCC and other regulatory bodies to revisit their approval, the sources said.

The latest round of turmoil for the 10-month-old deal began late Wednesday, when MCI announced that the companies were reviewing “the economic terms of their existing merger agreement.” The review was in light of a surprise announcement by MCI in July that its efforts to enter the U.S. market for local telephone service would cost it $800 million this year, twice its previous estimates.

“There can be no assurance as to the outcome of the discussion,” the MCI statement said. The merger agreement allows either party to renegotiate the deal in the event of a “material change” in the value of either company.

BT was under pressure from shareholders to reassess the deal, and some British investors and analysts called for reductions of as much as 20% in the price it should pay for MCI. Under the original terms, BT agreed to pay $6 in cash and a 0.54 share of each BT American depository receipt for each MCI share. BT also agreed to assume about $4 billion of MCI’s debt.

“British Telecom has some leverage here, and it’s exercising it,” said Scott Wright of Argus Research Inc. in New York. “MCI’s losses really gave BT an opportunity to say, ‘Look, we like the deal strategically, but we’re not going to pay the price we were going to.’ ”

Most analysts doubted the deal would collapse. “It’s important for both of them,” Wright said. “It’s too late for them to unscramble the egg at this point.”

But another trader, who requested anonymity, painted this scenario: “BT could say they’re really nervous about this thing, they need protection. They want a 25% price cut. MCI says, ‘We understand that, but we can’t bring that to our stockholders,’ so they can’t come to terms. The odds still favor a deal at a very substantial cut. But once you get into this type of situation, really all bets are off.”

BT’s second thoughts about the price it should pay for MCI are based mainly on the unexpectedly high cost MCI faces in building the facilities necessary to enter the newly competitive $100-billion market in local telephone service.

“The promise of local competition has been much slower to materialize than any of the long-distance carriers wished,” said Judy Reed Smith of Atlantic-ACM, a Boston telecommunications consulting firm.

MCI and BT are considering paring down MCI’s local efforts by focusing only on markets where local carriers have gone furthest to make networks available to competitors, according to sources at the companies.

But the local market isn’t BT’s only concern. MCI also has seen stagnant growth rates in its core long-distance business. And the reality that regional Bell companies soon will enter the long-distance market makes MCI’s growth prospects in that business less certain.

The timing of the FCC approval--which was expected next week rather than Thursday--was not a coincidence, MCI and agency sources said. “It’s quite clear the FCC was monitoring the news,” said one MCI executive who requested anonymity.

News of the renegotiation caused MCI shares to drop 17% Thursday, closing down $6.13 at $30.56 on Nasdaq. It was the most actively traded stock, with 64.2 million shares changing hands. BT’s American shares gained $4.38 to close at $66.38 on the New York Stock Exchange.