Mercury's pounds 5bn merger with cable firms heralds huge telecoms indu stry shake-up

The most significant restructuring of the UK telecommunications industry since the advent of competition five years ago was unveiled by Cable & Wireless yesterday with a pounds 5bn deal to merge its British subsidiary, Mercury, with three of the largest cable operators, Nynex CableComms, Bell Cablemedia and Videotron.

The combined company, to be called Cable & Wireless Communications, will be by far the UK's biggest cable operator, with 1.3 million telephone and television customers concentrated in London, Manchester and Leeds, and assets of pounds 3bn.

It is likely to pose the most serious competitive threat so far to BT, which has managed to hold on to more than 90 per cent of its domestic customers, and to BSkyB, which competes with cable operators in the pay- television market.

The takeover of Videotron by Bell Cablemedia had been widely trailed, but the inclusion of Nynex, the second-largest British cable operator after Telewest, stunned the industry. It was such a closely guarded secret that even several senior Nynex executives in the UK were unaware of the talks.

The speed with which the companies concluded the agreement, after just three weeks of negotiations and 10 days of in-depth talks also surprised the City, which had waited for Dick Brown, Cable & Wireless's recently appointed chief executive, to give his company a clear direction.

Mr Brown said the "lead and the spark" behind the deal had come from Cable & Wireless. "It was a deal waiting to happen. The UK cable industry was waiting for the first move ... if somebody didn't jump in, pull it together and make it happen, somebody else would," he explained.

Cable & Wireless said it did not envisage any regulatory obstacles to the completion of the merger. Both the industry regulator, Don Cruickshank, and the Government had been warned about the deal in advance. It will also be reviewed by the Independent Television Commission, which regulates the cable television market.

The new group claims to be able to offer the first genuine one-stop-shop for customers with services ranging from conventional telephones, to cable television and Internet access. It will include cable franchises in London, Manchester and Leeds in addition to Mercury's 700,000 residential customers who access the service indirectly through a button on the telephone handset.

Analysts pointed to potential cost savings through the combined operation's much tougher purchasing power with suppliers, including BSkyB, the dominant pay-television company.

James McCafferty from stockbrokers Hoare Govett said: "This is smart deal by any standards. What this means for the new company is that it combines local distribution with a high quality long-distance network giving operating cost savings through lower interconnection charges."

Cable & Wireless shares jumped 26p to 467p, while Nynex rose 23.5p to 119.5p. Shares in other listed cable operators were also buoyed by the news.

The terms of the four-way merger are complex, starting with the $1.009bn (pounds 685m) takeover of Videotron by Bell Cablemedia, the UK offshoot of Bell Canada International. To help fund the purchase, Cable & Wireless will invest $338m (pounds 212m) in Bell Cablemedia shares.

Nynex, Bell Cablemedia and Mercury will then be merged into the new group, Cable & Wireless Communications, which will be floated on the stock market by next spring. When the merger is completed, Cable & Wireless will own just under 53 per cent of the new company. Mr Brown said his priority was that Cable & Wireless would continue to own the controlling stake.

One obvious element missing was Mercury One2One, the mobile network in which Cable & Wireless has a 50 per cent stake. Mr Brown dismissed speculation that One2One's other shareholder, US West, which also owns part of Telewest, had blocked its incorporation into the new group.

The next step will be to appoint a new management team to run the company which will involve advertising key jobs externally, in a process that is also sure to lead to a shake-out of management in all four companies. Dan Somers, Bell Cablemedia's chief executive said: "This is a company that needs the best and the brightest management team, taken from inside and outside the industry."

John Killian, the chief executive of Nynex CableComms, declined to comment on the announcement until details were presented to the board. "The deal with Cable & Wireless is likely to take several months to finalise and we must get on with our business," he said.

There are also certain to be job losses as a result of consolidating activities such as administration and billing.

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