BT in US talks over pounds 2bn sale of Mercury

BT is considering selling Mercury Communications to a group of US financiers for as much as pounds 2bn to clear the way for the takeover of Cable & Wireless. An approach is believed to have been made by the Americans to BT, which is also considering an alternative option to sell Mercury to the telecommunications giant AT&T.

C&W has an 80 per cent stake in Mercury, the main rival to BT in the UK with a nationwide fibre-optic network. Analysts said yesterday that the stake was worth at least pounds 1.6bn and might even fetch more than pounds 2bn.

City sources said the US consortium could include banks such as Salomon Brothers - which is regarded as extremely strong on telecommunications - and Morgan Guaranty. Any proposal by the banks would need the involvement of Bell Canada, which owns 20 per cent of Mercury.

The sale of Mercury, BT's main UK rival, is inevitable if the pounds 35bn merger with C&W goes ahead. On Thursday the companies ended months of speculation by confirming that talks were underway "which may or may not lead to a merger". The negotiations at this stage are being conducted by advisers rather than management. NM Rothschild is the merchant bank acting on behalf of BT and Goldman Sachs is advising C&W.

Shares in C&W rose 20.5p yesterday to 532p. BT's shares closed at 369.5p, up 21p on the day. The share price rises increased C&W's market value by pounds 475m to pounds 11.75bn, and BT's by pounds 1.32bn to pounds 23.22bn.

One City analyst said a sale of Mercury to an independent group rather than a rival such as AT&T would "be loved by BT" if it could be made to work. There is speculation that Deutsche Telekom could also emerge as a suitor for Mercury, but that would again be opening the doors in the UK to one of BT's main rivals. Other rumoured potential buyers include Nynex, the US-owned company which is one of the largest cable companies in the UK.

A key factor in whoever might buy Mercury would be the views of the industry watchdog, Oftel, which has made it plain that whoever takes over Mercury must be strong and committed to competition in the UK market. Don Cruickshank, director general of Oftel, said earlier this month: "What we are after [if BT and C&W get together] is committed shareholders and an effective management team."

A spokesman for the Consumers Association said the sale of Mercury could give the company renewed impetus in the domestic marketplace and help consumer choice in telephony.

The Government, which has golden shares in both C&W and BT, is thought to have given its implicit approval to the merger. Ministers are said to be keen to see the creation of a powerful UK telecommunications company with the ability to compete effectively in the international arena and have been kept informed of the negotiations between the two groups. A spokesman for the Department of Trade and Industry declined to comment but pointed out that, in the first instance, the matter would be one for the Office of Fair Trading.

A marriage between BT and C&W may take the form of a reverse takeover by C&W in an attempt to get around regulatory hurdles overseas. Cable has licences for mobile and fixed telephony operations around the globe of which the jewel in the crown is the 57.5 per cent stake in Hongkong Telecom. The merger could also face problems in Germany, where both groups have joint venture companies.

The marriage would also involve the disposal of One-2-One, the mobile telephony joint venture between C&W and US West. BT already has a mobile network through its 60 per cent stake in Cellnet.

BT has consistently refused to discuss the situation, but Sir Iain Vallance, chairman, is thought to have met with C&W at the end of last year with a view to finally clinching a deal. Sir Iain's approach followed his rival's descent into turmoil after a boardroom row which lead to the departure of Lord Young, chairman, and James Ross, chief executive. C&W has been searching for a new chief executive and said in January that it hoped to find a replacement by today.

City analysts now believe that the only question is the timing and terms of the takeover.

Comment, page 19

Stock market history of BT

Privatisation

December 1984: The Government privatises BT with the pounds 3.9bn sale of shares in the company. BT is unleashed into the marketplace with one fledgling rival in national public telephony services - the Cable & Wireless subsidiary, Mercury Communications. The companies had a guarantee of a duopoly over public telephony until November 1990.

Duopoly review

November 1990: Government begins review of the duopoly culminating in a White Paper in March 1991 which said public telephony licences would be issued to other bona fide companies. Cable television companies given the right offer operate their own public telephone exchanges, sparking a revolution in local cable telephony services.

Watchdog bites

1995: Dialogue begins with Don Cruickshank, the telecommunications industry watchdog over future regulatory regime. In July Mr Cruickshank raised the issue of introducing a general licence condition giving him blanket powers against anti-competitive practices. BT vehemently disagrees with the proposal and relations with the regulator deteriorate.

Tough price controls

1996: Mr Cruickshank publishes proposals for continued tough price controls to take effect from 1997 to 2001. The watchdog decides to put the plan forward as a package with new powers against anti-competitive behaviour. Should BT fail to agree, the matter will be referred to the Monopolies and Mergers Commission.