BT shares fell five per cent yesterday when it admitted its revised merger deal with MCI has no escape clause should the US telco report further financial bad news.
Analysts described the omission of a get-out clause as "extraordinary", particularly as BT was seen to be the dominant partner in the negotiations. Shareholders were angry, questioning what would happen should MCI drop another bombshell like its dramatic profits warning earlier this year, which sparked off the renegotiation of the merger deal.
They also saw BT's agreement to pay $750 million in compensation should its shareholders reject the new deal as an unnecessary compromise.
Shares fell 22 1/2 pence to 413 1/2 pence, wiping off most of the gains made when the revised terms were outlined on Friday.
The original agreement contained a 'material adverse change' clause, but this was omitted from the new terms, despite warnings made by MCI on Friday that it may have to take "material charges" for its fiscal 1997 year, which could run into hundreds of millions of dollars. The only circumstances in which BT could back off the merger are deliberate withholding of information by MCI.
More sympathetic analysts believed the lack of a get-out clause was BT's sop to MCI, whose shareholders have filed a lawsuit claiming the new deal undervalues the company, and a sign of good faith. The new terms reduce the price of buying the stake in MCI that BT does not own by #3 million and offers MCI shareholders fewer shares in the combined operation, though a greater cash pay-out.
Another concession to MCI is that directors will be protected against any legal claims should BT shareholders reject the merger.
The two companies hope the merger will be completed by Christmas although BT shareholders will not vote until November and the MCI lawsuit may hold up the process too. While MCI shareholders received full information of the revised deal via a filing with the US Securities and Exchange Commission yesterday, BT shareholders will have to wait for a full report until October.
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