In affirmation of the adage that there's no smoke without fire, BT this week confirmed the long standing rumour that it is in talks with AT&T about merging the two companies' business services operations.
Unconfirmed reports say that the chief executives and senior management of the two telecoms giants met at a hotel near London's Heathrow airport two weeks ago to map out the terms of the deal. But beyond chief executive Sir Peter Bonfield's U-turn on his recent claim that any talk of a merger was "pure speculation", BT has divulged little else.
The revelation brings to an end months of speculation that the two organisations are keen to extend their shared interests, however. These currently include the Concert joint venture, which provides services for multinational business customers, and the Advance wireless initiative.
But exactly what form the next phase of collaboration will take is still unclear. Nor at this early stage have the feelings of US, UK or European regulatory bodies towards a prospective merger been made known.
What is becoming increasingly evident as the year progresses, however, is the reason why the two businesses are being driven into each other's arms.
Like marooned Arctic explorers huddling for warmth, AT&T and BT are battling tough conditions of striking similarity. Both are having a rough ride in their home markets in spite of exercising considerable dominance, and both have watched their share prices plummet, thanks largely to the very vocal disapproval of Wall Street and the City respectively. They also share galloping debt burdens, which is the main reason for this disapproval.
United we stand ...
And more seriously, both are being cited with increasing regularity as possible hostile takeover targets, and have evidently concluded that their chances of resistance are greatly augmented by a partnership.
Steve Thorpe, a spokesman for the Telecoms User Association, said: "BT and AT&T have been looking over their shoulders at possible takeovers. By getting their business services operations together, which is where the real money is, they are making it a lot harder for such a bid to succeed."
He believes that a likely strategy will be to expand the scope of Concert, making it the umbrella for all business-to-business activity for both parties.
But Thorpe believes that the possibility of such a merger ought not to concern UK businesses. "A merger would mean a strengthening of BT's position, which might, in turn, lead to a reduction of business tariffs. And when BT drops its prices, all others tend to do so as well since they regard BT as the pricing benchmark," he said.
However, Thorpe conceded that regulators might take a different view. "Someone like the Department of Trade and Industry might say no. But I doubt it. AT&T is just not that big over here. When it launched into the UK in 1995, there was a lot of fanfare, but the ice cube has since melted in the sun. There is always the possibility that, on a European or global basis, some regulator or other might think the merger was a problem."
BT's board of directors, not to mention its shareholders, will be hoping to catch regulators on a good day as details of any prospective merger await the rubber stamp. But a merger is only one of a narrow range of options BT faces as it tries to dig itself out of what has become a considerable hole.
The company is currently some £20bn in the red, a staggering sum that is expected to lurch to £30bn following the more expensive than expected purchase of third-generation mobile licences in the UK and Germany.
Among other cash raising strategies that it is experimenting with is selling off some of the more obscure parts of its operations to other telcos, and raising cash from other parts by way of flotation.
So far, it has sold its aeronautical and maritime division to Canadian telco Stratos for £157m. This includes the telco's satellite up-link stations and its New Zealand subsidiary BT Netley, which operates Inmarsat's land-earth stations that serve the Pacific.
BT has also said it will at least partially float Yell, its Yellow Pages division, by the end of the year, and professes to have high hopes for newly created divisions such as Ignite and BTopenworld.
But it does not take a degree in mathematics to realise that it will take an awful lot of Ignites and maritime assets to make up a £30bn shortfall. The City is presently urging the supplier to stop trimming here and there, and get more drastic. An option that BT has yet to countenance is the sale of bigger, more strategic chunks of its business such as the IT services companies Syncordia and Syntegra.
BT is determined to preserve an illusion of calm at all costs, however. It has fiercely denied being forced into a panicky fire sale of assets to meet its debts, and insists that such rationalisation is part of a broader corporate strategy.
... divided we fall
But with its shares valued at half last autumn's all time high of £15 and still falling, and a credit rating in the doldrums, an attempted takeover looks as if it will only be a matter of time. Either that, warn analysts, or the company will fall apart under the strain to become dozens of smaller units that forsake the cumulative power of the whole.
AT&T is likewise trying to raise cash, reduce debts and generate a sense of optimism. This week the company's board convened for a two day retreat, which it was at pains to stress was all about planning for long term stability, but which was almost certainly a council of war to come up with a quick fix. A spin off of its wireless division or long distance consumer operations is being tipped by the smart money.
Like BT, AT&T is not promising to announce the results of its strategic review process in the short term. But in both cases, circumstances could well force the pace. Both may be well advised to do what they are going to do sooner rather than later, while there is still an element of choice about it.
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