Merger may leave BT dis-Concerted

Just a month after patting itself on the back for getting MCI Communications Corp. to accept a reduced acquisition price, British Telecommunications plc had its plans of global expansion thrown into question this week as U.S. telecommunications company WorldCom, Inc. put in a higher bid for MCI.

WorldCom shocked BT, MCI and its shareholders yesterday by announcing its $30 billion to acquire MCI, a full $9 billion over the market's current valuation of BT's $21 billion bid for MCI. What looked like a done deal at the end of August between BT and MCI has been torn asunder by the bid, which WorldCom is confident will garner MCI shareholder approval.

BT has refused to comment on the tumultuous news, but the company's reticence is most likely due to outright dismay and confusion about its future viability in the heated global telecommunications race, if WorldCom does indeed buy MCI out from under BT.

What would a WorldCom-owned MCI mean for BT and MCI's joint venture, Concert Communication Services? If BT loses MCI, what will happen to its entire global strategy?

"BT would be a bit lost without MCI - it's part of its overall strategy," said Peter Orr, senior analyst at Dataquest in London. "There must be some worried people at BT."

One likely scenario is a continuation of BT's involvement with Concert Communication Services - of which it owns 75% to MCI's 25% - with WorldCom as its partner instead of MCI, said John Moroney, an analyst at Ovum, Ltd. in London.

However, whatever happens, BT isn't likely to give up its stake in Concert. "They (BT) aren't just going to lie over and die," Moroney said.

"The most likely scenario is that Concert will carry on, with BT and WorldCom becoming partners in running it," agreed Simon Reader, an analyst at London-based CIT Research. It is not really a possibility that BT would leave Concert altogether because it has signed contracts with customers that must be carried out, Reader said. Maintaining relationship with WorldCom via Concert Communication Services seems "sensible" for both parties, he said.

Whether BT will relent, or be forced, to sell its 20% stake in MCI to WorldCom is unclear. Holding on to only 20% - which would give WorldCom only 80% of MCI's 25% stake in Concert - would make managing MCI and Concert a nightmare, Moroney said. It would be a better move for BT just to back out of owning any part of MCI, to concentrate on running Concert with WorldCom as a partner, and to take the 10% stake in WorldCom that the company has offered as an olive branch, he said.

If WorldCom owns 80% of MCI and wants to buy BT's 20%, BT could be forced to sell since WorldCom will be the majority owner, Reader explained.

Whatever happens, BT will be forced to deal with WorldCom and all of the companies it has been rushing to acquire - such as telecommunications group MFS Communications Co. Inc., CompuServe Inc.'s network backbone service and UUNET Technologies, one of the world's largest Internet service providers, Moroney said.

"BT will be stuck with having to deal with WorldCom no matter what," Moroney said.

If WorldCom and BT were jointly to run Concert, questions could arise about who is competing with who in the corporate telecom market, some observers said. BT and WorldCom would be direct competitors in many markets, yet joint owners of a global data and voice network.

"MFS, a direct competitor to BT, is rolling across Europe like a steamroller," Orr said. Plus Internet and data services offered by Concert are similar to those offered by CompuServe's network subsidiary - soon to become part of WorldCom following appropriate approvals - and UUNET.

Another possible move for BT is to rebid at a higher price for MCI - something most analysts find highly unlikely due to the painful process BT has already undergone in trying to make shareholders happy with the reduced purchase price.

"We believed BT's strategy to go with MCI was sound and sensible, but U.K. investors came out against the deal, saying that BT was paying too much for MCI," Moroney said. The lower-priced bid and the disgruntled shareholders on both sides (some MCI shareholders have filed suits against BT for allegedly coercing MCI into accepting too low a price) exposed MCI to threats from companies such as WorldCom, he said. BT's stock soared on the news yesterday, as some shareholders breathed a sigh of relief that BT may get out of the MCI deal and may pay high returns to shareholders after selling its 20% stake.

"In terms of shareholders, it is excellent news," Reader said. "In terms of BT's long-term planning, though, it is not so good."

WorldCom has all the reason in the world to want MCI, and a link-up between the two U.S. providers makes more sense than a BT-MCI deal in the long run, Moroney said. "WorldCom suits MCI much better than BT does," Reader said.

Controlling MCI's long-distance and local service in the U.S. would move WorldCom into a No. 2 spot in the U.S. behind AT&T, as well as add coverage in Latin America through MCI's partner, Telefonica de Espana SA. In addition, with control of both CompuServe's and America Online Inc.'s global data networks and UUNET, WorldCom would become a huge player in Internet services by acquiring MCI's global backbone, analysts said.

WorldCom even hinted that it may try to acquire BT after it completes a deal with MCI, creating a global powerhouse larger than any other telecommunications provider.

Telefonica - whose wide-ranging assets in Latin America were seen as a coup for Concert when Telefonica left the AT&T-Unisource alliance in April to partner with MCI - would become a partner with WorldCom and BT would be left in the cold if the WorldCom bid is successful. The Telefonica deal with Concert has two prongs -the creation of Telefonica Pan Americana MCI in Latin America, and a share swap with BT if Telefonica chooses to exercise its option, said a Telefonica spokeswoman. Neither agreement has gone into effect yet, she said. The Spanish telco seemed confused at the news and said that it was "impossible to begin speculating when you don't understand [what's going on]," the spokeswoman said.

However, another scenario exists in which BT slowly backs out of Concert and goes to look for another global partner. But giving up on Concert entirely would be surprising, Moroney said. Leaving behind successful Concert would be "a major unbundling of years of work with MCI," Moroney said. Some analysts have speculated that BT will go back to Cable & Wireless PLC, which it tried unsuccessfully to acquire before bidding on MCI. But Moroney finds such an outcome impossible, since Cable & Wireless has lost interest in BT and have little to gain from joining with the telco.

"If BT wants to maintain its push (into global markets), it needs to find another partner," Reader said. However, linking with Cable & Wireless is next to impossible, he agreed. Instead, BT may look to strengthen its presence in Asia by teaming more closely with Nippon Telegraph and Telephone Corp. (NTT) of Japan. NTT would like to extend its global presence by moving into Europe, and BT has long been keen to crack the Japanese and Asia-Pacific markets, Reader said. Another possible partner is a U.S.-based Regional Bell Operating Company (RBOC), which would give BT a presence in the North American long distance and local markets, he said.

Up until yesterday, Concert PLC (what the new BT would have been called after acquiring MCI) was seen as the most favored player in the global telecommunications race, according to many observers. However, the alliance's unexpected vulnerability in face of the WorldCom bid could help the other competing global alliances get a leg up, Moroney said. For example, Global One, the alliance between Deutsche Telekom AG, France Telecom and Sprint Corp., could garner new support from possible Concert customers who are alarmed about the ups-and-downs of the MCI-BT deal, he said. The same would be true for AT&T Corp.'s global venture, World Partners. World Partners links an alliance of European telecom operators called Unisource with partners around the globe.

"New customers would do well to have a tentative approach in looking at Concert (now that the merger is being called into question)," Reader said.