Telefonica signs deal with BT

Telefonica, Spain's main telephones company, yesterday announced a tie-up with British Telecom and its US partner, MCI, which is a big blow for the international ambitions of AT&T. The Spanish carrier had been the largest member of AT&T's European alliance grouping, called Unisource.

AT&T's chief executive, John Walter, had personally intervened with Juan Villalonga, chairman of Telefonica, to try to prevent the Spanish carrier joining with BT.

Telefonica has a unique prize for BT and MCI, soon to merge to form Concert. It owns controlling stakes in large telephones companies in Argentina, Peru and Chile, giving it the best opportunity to exploit one of the world's fastest-growing markets.

Telefonica has 10 million phone lines in Latin America and almost 900,000 mobile customers. The Spanish carrier has a 25 per cent shareholding in Unisource, alongside PTT of the Netherlands, Telia of Sweden and Swiss Telecom PTT.

Attempts to limit the damage yesterday proved fruitless. As Mr Villalonga was giving a presentation at an official signing ceremony in Madrid with Sir Iain Vallance, BT chairman, his partners in Unisource issued a statement asking Telefonica to leave the alliance.

Earlier Mr Villalonga had played down suggestions that Telefonica would have to quit Unisource immediately. He said talks would start on Monday with partners: "We will jointly analyse the different implications over the next few days."

Unisource said the deal between Telefonica and Concert was incompatible with its existing alliances. Lars Berg, Unisource chairman, said: "It will lead to customer confusion and will slow down the opening of the European communications market."

It was unclear last night whether the dispute would end in legal action. Unisource said legal consequences were being sorted out. Telefonica insisted its Unisource agreement had not been violated.

Confusion also surrounded whether Unisource would replace Telefonica with the Italian state-owned phone network, Stet. Sir Iain appeared to emphatically rule out Stet joining with BT as well. He said: "That would be straining the concept of competition. It would be hard for the European Commission to swallow."

The scope of the BT/Telefonica deal was wider than expected. BT will buy 2 per cent of the Spanish carrier within a year for pounds 280m, while Telefonica will acquire 1 per cent of BT for the same price. In addition, BT and MCI have the option to buy 10 per cent of Telefonica's international business, Tisa, the vehicle through which it owns its stakes in Latin America.