Financial Jugglery Unites Differing Traditions

The principal investment bankers involved in negotiations from the autumn onwards were Felix Rohatyn of Lazard Freres in New York, John Nelson of Lazard Brothers in London, Tony Alt of N M Rothschild & Sons in London and Yves-Andre Istel of Rothschild Inc in New York.

As a firm structure for the deal emerged in September, BT also hired Morgan Stanley in London to advise on likely reactions to it among shareholders. Morgan Stanley was involved despite its historic role in the US as adviser to AT&T, the main rival to MCI in the US telephone market.

The Morgan Stanley involvement was mainly led from its London office by Michael Uva, a managing director, and Paulo Pereira, an executive director.

 

Rival investment banks Monday questioned whether its involvement would affect Morgan Stanleys relationship with AT&T in the US.

The first key meeting involving advisers came on September 24 and 25, when Bert Roberts, MCIs chairman and chief executive, and Gerald Taylor, president and chief operating officer, flew to London with Rohatyn for a full-scale meeting with BT and its advisers.

That meeting set the basic shape of the deal. The structure of the merged company and how it would be managed were not difficult to devise a far more tricky issue lay in sorting out a financial structure that would bridge the gap between what were widely different companies.

This was a difficult matter, and Rohatyn says that the negotiations were hard-fought. We were close to breakdown a couple of times. There were some very difficult moments but both sides were on the same wavelength, and industrial logic kept driving it forward, he said.

The principal challenge lay in the differing characteristics of the two shares. BT shares tended to be bought for their yield, rather than growth.

In contrast, MCI was a classic growth stock that had a different class of shareholders.

The main task was to find a way of pleasing two different audiences. The structure of a special dividend to BT shareholders and a cash payment of 2.3 billion to MCI investors was intended to bridge this gap while injecting leverage into the BT balance sheet.

The bankers devised a structure allowing BT to be a little more dynamic, says one investment banker. Nonetheless, a final agreement was hard to achieve. After a meeting 10 days ago between Alt and Nelson ended in what seemed to be deadlock, the companies had to rekindle talks.

A settlement was reached between Sir Peter Bonfield, BTs chief executive, and Mr Taylor shortly afterwards. All these things break down a few times before they can be finally settled, says one banker.

Rohatyn says the talks might have had to be abandoned if relations had suffered: There is a point where it is better to go back to the status quo ante if you are not making any progress.

For Lazard and Rothschild, the deal has been a chance to demonstrate their expertise in one of the most fast-moving of industrial sectors. Fees have not yet been agreed, but it is unlikely to be the largest pay-day for any bank involved, in view of the existing links between BT and MCI.