By Debora Tidwell (TMF Debit)
UNION CITY, Ca., November 5, 1996/FOOLWIRE/ --- MCI Communications and British Telecom held a conference call on November 3rd. They were pleased to announce the definitive merger of two existing partners. They already joined forces to create the first seamless global services company. Now they are taking the next step to truly define global communications in the new millenium. They announced Concert, a new high-growth global communications powerhouse borne from the union of British Telecom and MCI.
This is different from the "Concert" they created three years ago. That organization will now be called Concert Communications Services. This new global company will provide local, long distance, and international services including voice, data, wireless, Internet, information technologies, and outsourcing.
OPERATIONAL BENEFITS. While BT and MCI will continue to sell and service customers under their own names in their respective home countries, the power of Concert will combine BT's financial resources and global position with MCI's growth momentum and competitive market expertise. Taken together, these assets create the first truly global communications company with customers around the world, a multi-national management team, dual transatlantic headquarters, and shares traded on three stock exchanges across the globe. Simply put -- a company with the size and scale to compete with any one, any where, and win.
FINANCIAL STRENGTH. With $42 billion in revenue, cash flow of $12 billion, and 183,000 employees, they believe Concert has the financial muscle, global brands, customers, technology, and network to reach and deliver the benefits of competition to customers around the world. But, most importantly, Concert's scale will allow it to balance the competitive pressures in one market with successes in other markets. In that way they will be able to deliver dependable and, in fact, accelerating shareholder returns --- returns that they want to be among the highest of all companies worldwide.
BENEFITS THEY HOPE TO GIVE SHAREHOLDERS. At a time of extreme uncertainty of the performance of telecommunications companies in the US, they believe this merger will deliver a more certain outlook on the performance of their new company. They feel that Concert shares will be a truly unique security, one that offers the earnings of a growth company, combined with the income and consistency of a high-yield instrument. In fact they are confident that the shareholders will receive almost twice the returns with the combined company than if each company remained a standalone entity.
HOW WILL THEY DO THAT? They will focus on two key objectives. First they will continue to focus on the profitable growth of their core businesses in each of their respective domestic market but now aided by each other's expertise. Second, they will combine their resources to fully exploit the high growth market opportunities in the US, throughout Europe, and around the world.
This merger will also provide significant synergies and new revenue benefits. In total, they expect to save about $2.5 billion over the next 5 years. The financial synergies are so compelling, it is their goal to make this merger accretive to earnings in about two years from the time of closing.
They will reduce costs by developing technologies jointly, by purchasing on a global scale, by configuring their international networks more efficiently, and by eliminating redundant administrative expenses. They are going to pick from the best of breed technologies to improve the offerings of both carriers and they will do this with coordinated R&D and elimination of redundant capital projects, thereby maximizing returns on their total cash outlay. The new technology will be used to build a single worldwide platform that provides totally seamless services. They will gain benefits from an intelligent network that is designed to work as one with scaled network management and a reduction in the cost of back office operations.
They are going to unify their information technology groups. That will enhance revenues by increasing the returns on their high growth markets. They will incorporate products from both companies into the seamless global service set. They will do that by deploying talented management resources effectively across the entire organization. The benefits of working together are not future benefits they anticipate, they are proven benefits they have observed. In working together over the past three years, they know their goals are realistic and obtainable. Their partnership has delivered outstanding results in the marketplace.
BUILDING ON THEIR WORKING RELATIONSHIP HISTORY. The Concert Communications Services joint venture is an unqualified success, ranked #1 by all the market surveys. With 3,000 customers and $1.5 billion in revenue under contract, their current joint venture is the perfect foundation for the new Concert. They will continue what they started with Concert Communications Services. Products and services will be brought to the global marketplace with greater speed and efficiency than either partner could accomplish by itself. They will be able to build a product portfolio and sales and service network that they think will be unmatched worldwide. They are going to share product platforms for domestic use in each of the countries' operations, and that is not just the UK and US, that is Spain, France, Germany, The Netherlands, Italy, and the rest of the world.
ENTRY IN LOCAL US MARKET TOP PRIORITY. The local services opportunity for Concert in the US is the largest and most profitable near-term opportunity either company is involved in. With $100 billion in revenue and $43 billion in cash flow, this ranks #1 on Concert's priority list. Their merger now makes MCI even stronger to address this exciting opportunity. With unmatched financial strength, a growing local facilities network, and BT's expertise at managing and offering local services, they believe they are going to define new rules of competition in the United States communications market. They assert that the recent stay on the part of the FCC was not a win for consumers, but in MCI's case the opportunity is still enormous and they are going to focus their efforts in those states most open to competition.
Their immediate opportunity is in the business market. As a point of fact, just over 60% of MCI's revenues today come from business customers. The same will hold true for Concert as well. With the power and the assets of Concert, their customer relationships, and a national sales and marketing infrastructure they feel they have all the ingredients to address an immediate $20-25 billion business opportunity through their local switches and facilities.
v They will continue to roll out switching facilities for local services in 25 cities by January and they will quickly put sales and support teams in place to expand the customer base. They believe that customers are asking for choice and they are going to deliver it. Local service is a major component of their growth strategy for the new Concert.
COMMENTS FROM BRITISH TELECOM. BT is one of the world's leading providers of telecommunication services and its stock has traded in New York for almost 12 years. Their customers include single-line domestic users and some of the world's largest multi-nationals. In the UK they have over 20 million residential customers and almost 7 million business customers. They handle about 100 million local, long distance, and international calls across their network every day. They have among the lowest toll charges in the world.
Their strategy has been three-fold. First, to grow their market for basic services in the UK. Second, to develop their market for mobile and advanced services including multimedia and the Internet. Third, to expand outside the UK, with an initial emphasis on services for multi-national companies.
The UK is one of the most open markets in the world, with competition in all sectors of the market including local access. BT has had an annual capital expenditure of some 2.7 billion pounds in recent years to build a high quality digital network. UK customers can already take advantage of advanced network services and new products such as interactive games, Internet services, etc.
They have also begun to expand successfully into key international markets. BT is now extremely well positioned with partners in all the markets including Germany, France, Holland, Italy, Spain, and Scandinavia in Europe. They are acknowledged to be the most aggressive of the European telecommunications companies.
As for the Asia Pacific region, where they see the fastest economic and communications growth in the world, the BT/MCI Concert alliance already has the best reach. They are now working on giving the alliance depth to be able to handle the huge demand, particularly for Concert Communications Services, by forming special relationships with key players at a sub-regional level. They already have joint ventures in Japan, India, and New Zealand and they recently announced their intention to form a joint venture in Korea. There is plenty more to come in the region and this merger will make Concert a particularly attractive partner to the major Asia Pacific players who share Concert's ambition and energy.
They are looking forward to bringing MCI people into BT's European joint ventures to capitalize on their skills in attacking a monopolist encumbent. They, in turn, feel they can help MCI to attack the opening local access market in the US. The things they want to do are built off their traditional business strengths. They will also be leaders in new markets digital technology is bringing such as network-based systems integration -- a fragmented industry, customers cry out for someone to put it together for them globally, and that is what the merger will do.
MULTIMEDIA & INTERNET OPPORTUNITIES. The biggest long-run growth opportunity of all is in multimedia including intranet and Internet services where MCI already carries 40% of the world's Internet traffic. BT has just concluded the world's most advanced market trials of interactive services. Whether it is to the PC or the TV, between them they feel they understand what customers want and what they will pay for what they want. The complementary players in the multimedia and Internet worlds are already beating a path to their separate doors and they will find MCI and BT together irresistable as partners.
HOW THE NEW COMPANY WILL BE STRUCTURED. BT and MCI will be 100% owned subsidiaries of Concert and will continue to sell business and consumer services under their own brand names to their respective home markets through separate operations. In addition, several new divisions will be formed -- the International Correspondent Business, Global Alliances, Joint Ventures, Systems Integration, and two divisions to manage development businesses, Mobility and Multimedia.
The two chairmen (of BT and MCI) will share the office of chairman at the new company, with Mr. Marshall (the Chairman of British Airways) as deputy chairman. Peter Barnfield will become CEO responsible to the board and Jerry Taylor, currently President of MCI, will report to Peter as President and COO. There are two other executive directors, the current CFO of MCI (who will be the CFO of Concert) and Robert Brace will be deputy chief executive of BT as well as being responsible for overseas operating alliances. Apart from the deputy chairman, there will be 8 other non-executive directors, 4 each from BT and MCI. To help consolidate their partnerships and to make them effective immediately, two non-executive directors of BT will join the MCI board and vice versa.
Mergers don't always work. They feel this one will because over the last 3 years they have gotten to know each other really well. They have worked through some turf battles and the occasional philosophical difference and they have worked through them. Where they have been able to merge the two cultures, the cost of services results have been spectacular. They feel they are ready for the merger and to work together permanently.
WHAT IT SPECIFICALLY MEANS TO SHAREHOLDERS - STOCK SPECIFICS AND FUTURE EXPECTATIONS. They believe they are creating a most compelling investment vehicle for their shareholders today and over the long term. The agreement calls for a complete merger of BT and MCI. Under the terms of the agreement, for each share of MCI, shareholders receive a newly issued Concert ADS equivalent to 0.54 times a BT ADS. Additionally, MCI shareholders will receive $6 in cash. There will be a total of $3.5 billion in cash and $3.1 billion newly issued shares of BT to be distributed. The actual value to MCI shareholders is dependent on the price of BT stock at the time of closing. Based on the last 45 days average price of BT, the value would be between $35 and $36 per share which includes the $6 per share paid in cash.
This cash/stock structure was decided upon for four reasons. First and most importantly, this is a strategic merger and they wanted their shareholders to truly participate in the exciting future they foresee. Therefore, consideration is 85% stock. Second, they included a cash portion to optimize Concert's financial structure in balancing debt and equity. Third, with the share buyback that will be approved, shareholder equity will be further enhanced. Finally, owners of the new security will receive a significant yield of between 6% and 7% and, there is a considerable tax advantage to receiving a dividend from a UK company for tax-paying entities.
Prior to closing, BT shareholders will also receive a special dividend of 35 pence per share in order to create an optimal leverage structure leading to improved shareholder returns. Total consideration under the program totals approximately 2.2 billion pounds. BT intends to adjust the base level of the annual dividends to a level that reflects the special dividend. And, BT is forecasting a dividend of 19.85 pence per share for the year ending March 31, 1997 excluding this special dividend. This is an increase of 6.1% over the corresponding period last year.
v Dividends will continue to be an important component of shareholder value. This dividend policy is not going to be affected by the merger. Management believes that Concert's earnings and cash flow will continue to be strong enough to support a growing dividend. The policy will be to grow earnings at a higher level which will lead to an increase in dividend cover over time.
ACCOUNTING SPECIFICS. They will use the purchase method of accounting for this transaction. They estimate that the MCI equity value plus allowances for consolidation of operations and asset fair value adjustments versus the consideration paid by BT will create goodwill of at least $12 billion. Since Concert is subject to UK GAAP, this amount and the $2.4 billion in goodwill currently on MCI's books will be written off against equity and not amortized against earnings as it is done in the US.
TIMING AND REGULATORY APPROVALS NEEDED. They expect the transaction to close within 9-12 months. In the US they anticipate approval from the FCC, which will be asked to again further expand the foreign ownership limit. They will also need approval from the Department of Justice and the Committee on Foreign Investment in the United States to meet regulatory requirements under two Acts. They also anticipate approval might be needed in some states for the change in control of state licenses. The merger is also subject to regulatory approval in Europe. They will be consulting with the European Commission, the Office of Fair Trading, OFTEL, and the Department of Industry and Trade in the UK. They feel confident that the approval process will be a successful one. The formation of Concert creates an even stronger global competitor prepared to go head-to-head with the monopoly local telephone companies. The public interest goals of the Telecommunications Act of 1996, namely facilities based local competition, will be accelerated by the approval of the BT/MCI merger.
BENEFITS RELATED TO SYNERGIES & PLANS TO LEVERAGE THOSE SYNERGIES. Of the $2.5 billion in income synergies over the next 5 years, the majority is composed of reductions in non-capitalized development costs, reduction in the overlap of admistrative functions and facilities worldwide, purchasing economies created by buying on a global scale, the creation of new revenue opportunities at BT and in their new ventures, and depreciation savings as the result of reducing duplicate capital expenditures. In addition, they will save about $1.5 billion in capital outlays over the next 5 years. Annual savings to income will be nearly $850 million by the 5th year.
In addition, Concert will consider making repurchases of its own shares following closing of the merger and in insuing years. Power to purchase approximately 990 million shares, representing 10% of Concert's total shares outstanding will be sought at the BT shareholder's meeting to approve the merger. They expect to renew this annually.
Considering the upside and the current share price of BT stock, they feel BT is significantly undervalued in the market. On a pro forma basis, after closing, Concert will have an estimated $12 billion in cash flow. This cash flow will be sufficient to internally fund their capital budget of approximately $8 billion and their annual dividend. Management feels comfortable with the resulting 40% initial leverage the company will have and their ability to hold a strong credit rating.
* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.