Taking the international call: BT's deal with MCI deal seems a high price to pay for furthering global ambitions, writes Mary Fagan

THE telecommunications deal of the century or another grand and costly overseas folly? That was the question being posed in the City last week as BT announced a dollars 5.3bn marriage with MCI, one of the largest long- distance telephone operators in the US.

For BT, the deal underpins an ambitious international expansion strategy which it hopes will transform it into one of the top telecommunications companies in the world by the turn of the century. To the sceptics, it looks like every other international expansion strategy, essentially a piece of management aggrandisement of questionable value to shareholders and of no merit whatsoever to the ordinary British telephone user.

Would it not be better and fairer, they say, to spend the money on basic improvements to the UK telephone service and lower charges than to squander it on a largely worthless overseas spending spree?

The tie-up with MCI ends months of rumours concerning a link between BT and EDS, the communications subsidiary of General Motors. BT also hopes that it puts paid to criticism over its aborted relationship with McCaw, the US mobile telephone company in which it took a 20 per cent stake for dollars 1.37bn in 1989. BT is now in the throes of selling the stake to its arch-rival, AT&T, for dollars 1.8bn.

With the pounds 5bn sale of the Government's remaining shares in BT looming, it is hard to gauge the real feeling in the City on the latest transaction. The legion of City firms involved in the sale are banned from saying anything remotely critical. And the few that are not involved tend to be hostile if only for the sake of being contrary.

The link with MCI is twofold. BT's dollars 4.3bn cash will buy it a 20 per cent stake in MCI. At dollars 64 per share that represents a 20 per cent premium to the MCI share price. BT cannot increase its stake for 10 years under the agreement and, in any case, under current US regulations foreign shareholders are limited to 25 per cent of voting rights in a telecommunications firm.

At the same time, BT and MCI are forming a joint venture to market seamless telecommunications services to business customers worldwide. This has been the long-stated strategy of BT. Estimates of the potential market for international business communications vary from hundreds of millions to billions of dollars within a decade. The BT/MCI venture and others like it target private services rather than basic switched telephony, which continues as before.

BT and MCI plan to invest dollars 1bn in attacking the market through the 'Newco' joint venture, in which BT has 75 per cent. In future they may include a partner from the Far East, the most likely candidate being NTT, the Japanese giant.

BT is also selling the operational assets of BT North America to MCI for about dollars 125m. That arm of BT consists mainly of Tymnet, the data networks company that BT acquired in 1989 for dollars 355m. It is not clear how much of the value of Tymnet is being swept into MCI - BT will for example retain software rights and intellectual property rights - but MCI does appear to be getting BT North America for a snip.

BT has been seeking international partners to help it share the cost of providing its global business services. The company already has a business, Syncordia, that provides and manages private communications networks and services on behalf of large businesses. A much more ambitious project, Cyclone, was to provide the infrastructure underpinning BT's international divergence. Newco can now absorb and share the cost of all that.

The multinational market that Newco is gunning for has already attracted the attention of AT&T, which within the past few weeks has announced its own Worldsource partnership with KDD of Japan and Singapore Telecom. Similarly, France Telecom and Deutsche Bundespost Telekom have joined forces in Euronetcom, while the Netherlands' PTT has a partnership with Televerkert of Sweden.

With the competition getting hot, BT's agreement with MCI has been warmly welcomed by many observers. MCI is a highly regarded company which has in 25 years come from nothing to be the second-largest long-distance carrier in the US and a big international player. The joint venture, most agree, cements BT's drive outside the regulated UK market and represents a formidable team.

The more difficult question is why BT felt that the acquisition of a stake in MCI was necessary. Presumably MCI refused to countenance one without the other but a dollars 4.3bn, largely passive investment seems a high price to pay for the prize of a dollars 1bn joint venture. As analysts at Kleinwort Benson observe: 'Certainly all the other consortia so formed have required no such huge collateral commitments.' There is also a feeling among BT watchers that the deal smacks of the McCaw saga.

Further, there is a tendency to hark back to BT's other ill-fated international partnership with Mitel, the Canadian manufacturer of telecommunications equipment. BT bought 51 per cent of Mitel in 1986 for pounds 156m only to sell it last year at a loss of pounds 135m.

Iain Vallance, BT's chairman and chief executive, insists that Mitel was part of an earlier stage in BT's history and that things are now much changed. He also claims BT would have been happy to stay in McCaw had AT&T not come along. Sceptics might be forgiven for believing otherwise.

One senior industry executive also points out that BT appears in effect to be withdrawing from the US market. Within the Newco joint venture, MCI will have the rights to market jointly branded products and services in the Americas and the Caribbean while BT takes on the rest of the world. At the same time BT is relinquishing its BT North America subsidiary.

It is true, on the other hand, that BT is still pursuing a licence application to become a US telecommunications operator in its own right. However, Michael Hepher, BT's group managing director, said: 'Clearly if this thing (with MCI) happens, we will feel our American delivery will be taken care of in a very decisive fashion. We can then turn our attention to Europe.'

Kleinwort Benson also believes that BT and MCI will have to take a careful view of what falls into the Newco mandate and what they can target as companies in their own right. The latest report from Kleinwort warns: 'BT will have to ensure that Newco does not get elbowed aside by the MCI parent in US-originated business.'

Most intriguing of all is the timing of the announcement, a mere six weeks before the bonanza of the Government's share sale.

BT says that as a private company, it saw no need to consult the Government before the MCI agreement. But it will certainly have given the mandarins at Treasury and their advisors some extra food for thought.

(Photograph omitted)