BT 1998 Annual Report Download - page 59

N O T E S T O TH E F I N A N C I A L S TAT E M E N T
15. Fixed asset investments (continued)
(a) Subsidiary and associated undertakings
Details of the principal operating subsidiary and associated undertakings are set out on pages 78 and 79.
(b) MCI Communications Corporation
In September 1994, the company completed the acquisition of a 20% equity interest in MCI (the second largest carrier of long-
distance telecommunications services in the USA) represented by a holding of 136 million Class A common shares, whereupon
MCI became the group’s most significant associated undertaking. On 3 November 1996, the company entered into a merger
agreement with MCI whereby the group would acquire the entire share capital of MCI, not already owned. On 21 August 1997,
the terms of the merger agreement were modified. On 1 October 1997, WorldCom announced its intention to offer shares in its
company to MCI shareholders as an alternative to the proposed merger and, following an improved offer from WorldCom on
9November 1997, the company agreed that it would support the proposed merger with WorldCom to which the MCI board had
agreed on the same day. On 11 March 1998, both MCI’s and WorldCom’s shareholders approved their merger.
The company has agreed with WorldCom and MCI to sell the group’s holding of 136 million unlisted Class A common shares in
MCI to WorldCom for US$51 per share in cash at the time the MCI/WorldCom merger is completed. The potential consideration
of US$6,936m was equivalent to £4,137m at the exchange rate ruling on 31 March 1998. The completion of the merger is subject
to regulatory clearance. The group also holds 0.7 million listed common shares in MCI, most of which were purchased in November
1995. These shares will be exchanged for WorldCom common shares on completion of the merger. If fully listed, the market value of
the MCI shares held by the group at 31 March 1998 would have been £4,048m.
As a consequence of the termination of the company’s merger agreement with MCI and the company’s agreement with WorldCom
and MCI, the group ceased treating MCI as an associate from 1 November 1997. The group’s share of its associates’ results
includes a loss before tax of £27m for its share of MCI’s results up to that date (1997 – £175m profit, 1996 – £101m profit).
At 31 March 1998, the group’s investment in MCI is stated at £813m (1997 – £834m). Goodwill amounting to £2,214m has been
written off to group reserves in prior years in respect of this investment and this goodwill will be accounted for at the completion
of the MCI/WorldCom merger in determining the profit on the sale of the shares which the group will recognise.
In the period 1 April 1997 to 31 October 1997, the group’s turnover with MCI amounted to £108m (1997 – £134m, 1996 – £92m)
and the group purchased £56m in the same period (1997 – £87m, 1996 – £77m) in services and products from MCI.
(c) Cegetel
On 24 September 1997, the group completed its acquisition of a 26% interest in Cegetel, a leading French telecommunications
company. Of the cost of the investment in the associated undertaking of £1,029m, goodwill arising of £862m has been written off
against reserves.
The acquisition of the interest in Cegetel comprised:
£m
0111
Group share of original book value of net assets 483
Fair value adjustment to achieve consistency of accounting policies (316)
01§0§511000000000000 !!! 0111
Fair value to the group 167
Goodwill 862
01§0§511000000000000 !!! 0111
Total cost 1,029
01§0§511000000000000!!!0111
(d) Other investments
Other investments include ordinary shares of the company, with a net book value of £29m (1997 – £20m) and a market value of
£68m (1997 – £28m), held in trust for the Long Term Remuneration Plan and the Performance Share Plan (note 28). Also, in the
group balance sheet at 31 March 1998, listed investments were held with a book value of £117m (1997 – £72m) and a market
value of £154m (1997 – £61m).
(e) Subsidiary company acquisition
In February 1997, the group entered into an agreement to purchase from Banco Santander SA its 50% holding in the share capital
of BT Telecomunicaciones SA, a joint venture between a wholly-owned subsidiary of the company and Banco Santander SA, for
the equivalent of £76m. The transaction was completed in July 1997.
(f) Other related party transactions with associates
In the year ended 31 March 1998, the group’s turnover with its other associated undertakings amounted to £74m (1997 – £23m)
and the group purchased £9m (1997 – £30m) in services and products from these undertakings.