BT 1997 Annual Report Download - page 20

FINANCIAL REVIEW
20
Merger with MCI
The proposed merger with MCI, having been approved
by both BT and MCI shareholders, is now awaiting
regulatory approval. On completion, which is expected in
the autumn of 1997, BT will change its name to Concert
plc and issue, in the form of American Depositary Shares
(“ADSs”), 5.4 ordinary shares in the company and $6 cash
for every MCI share outstanding, except those already
owned by BT or subject to dissenters’ rights. Each ADS
represents 10 ordinary shares of the company and will be
traded on the New York Stock Exchange. Options
over Concert shares will be issued to MCI share option
holders who do not exercise their MCI options before the
completion date using similar conversion terms. As a
result of the merger, the company’s issued share capital
will be enlarged by approximately 50% and the cash
consideration is expected to total between £2.0 billion and
£2.3 billion, depending primarily on the number of
MCI share options exercised before completion.
Following the merger and based on MCI’s revenues for
1996, the group’s annual turnover is expected to increase
by around 80%. Earnings per share of the enlarged group
are expected, however, to suffer some dilution in the first
year after the merger.
The directors of BT and MCI are targeting pre-tax
synergy benefits arising from the full integration of the
two businesses at approximately £1.5 billion cumulatively
over five years following the merger. No significant capital
expenditure is expected to be required to realise these
savings, although some one-off restructuring costs are
expected to be incurred in the first few years following
the merger.
If market conditions are appropriate, the company will
consider making purchases of its own shares following the
merger and in ensuing years. Authority to purchase up to
10% of the company’s share capital was granted to the
directors at the extraordinary general meeting of
shareholders held in April 1997. Decisions on the
amount of cash to be used in buying back shares and the
precise timing will depend in part on market conditions
and other opportunities that exist for the deployment of
the group’s resources.
Foreign currency exposure
Most of the group’s current turnover is invoiced in
pounds sterling, and most of its operations and costs arise
within the UK. The group’s foreign currency borrowings,
which totalled £1,053 million at 31 March 1997, are used
to finance its UK operations and to finance the group’s
overseas investments, including MCI, in order to reduce
the currency exposure on the underlying assets. Cross
currency swaps have been entered into to minimise the
foreign currency exposure on the borrowings used to
finance the group’s operations. The group also enters
into forward foreign exchange contracts to hedge
interest expense, purchase and sale commitments. The
commitments hedged are principally US dollars. As a
result of these policies, the group’s exposure to foreign
currency arises mainly on the residual currency exposure
on overseas investments and on any imbalances between
the value of outgoing, transit and incoming international
calls with overseas telecommunication operators. To date,
these imbalances have not been material. As a result, the
group’s profit has not been materially affected by
movements in exchange rates.
The merger with MCI will naturally lead to an increase
in the group’s foreign currency exposure in the future
and the company will be adopting suitable policies and
procedures on completion of the merger to manage this
change in circumstances.