The demise of the alliance between British Telecommunications Plc (BT) and Telefonica de Espana this week raises the question: does the UK telco still have a strategy for expansion in the Western Hemisphere? Its previous one was unveiled with bells and whistles as a transatlantic merger with MCI Communications Corp in November 1996 and expanded to include Telefonica de Espana and Portugal Telecom in April last year. That gameplan now lies in tatters and the best BT can say is that it is now investigating opportunities in the US and elsewhere. For a company which, 15 months ago, was announcing the agreement with MCI as the beginnings of a premier global company, well positioned to take advantage of the rapidly evolving telecommunications industry, that sounds dangerously like being back at square one. The UK telco sought to finesse the end of its strategic alliance with Telefonica, saying there had been a ‘mutual, amicable agreement’ not to pursue the deal any further, rather than ‘an abrupt closure of negotiations’ as a result of any breakdown in communications.
By Rik Turner
It was simply, a spokesperson went on, that with BT’s proposed merger with MCI having soured, the context has changed. BT is now rumored to have two teams traveling full-time around Latin America, engaging in exploratory negotiations with potential business partners in the region. The company also holds up its ongoing relationship with Portugal Telecom as a possible avenue into Latin America, now that the link-up with Telefonica has fizzled out. However, the clout that the Portuguese outfit can command is infinitely less than its Iberian neighbor’s, even though it has a developing relationship with Brazilian monopoly telco Telebras. The latter company, or rather its 27 subsidiaries (one in each state of Brazil) and long-haul and international carrier Embratel, are earmarked for privatization between now and the end of June, with estimates for the earnings from these auctions put at anywhere from US$20bn to US$30bn. That Portugal Telecom has a relationship with the current administration of the holding company, Telebras, may then prove less important than the fact that Telefonica is already a minority shareholder in the only Brazilian telco already partially privatized, namely the Companhia Riograndense de Telecomunicacoes. By one of the anomalies of history, the telco in Brazil’s southernmost state, Rio Grande do Sul, was never part of the federal network known as the Telebras System, belonging instead to the state government. The latter sold off a 35% stake in the company in January last year, which was when Telefonica bought in. Now, with the rest of the country’s network up for sale, the wishes and opinions of CRT, and therefore Telefonica, must be taken into account. In addition, Telefonica makes no secret of its intentions of taking part in the privatization of the Telebras System. The Spanish telco is already a major player in other parts of the continent, via shareholdings in Chilean telco Companfa de Telecomunicaciones de Chile (CTC), one of the two regional phone companies in Argentina (Telefonica de Argentina) and Peruvian outfit Telefonica de Peru. Its intention is now to expand its presence in Brazil and, if a mooted alliance with MCI Wordcom bears fruit, enter the potentially lucrative Hispanic market in the US. With both its planned merger with MCI and the alliance with Telefonica consigned to past history, BT is thus little more than a wannabe in the Americas right now. Meanwhile it is holding fire in Spain, and announced last week that it would not be in the running for the third fixed-line license, for which bids had to be in by February 28. The Spanish market is liberalizing at the beginning of December this year, so that the three fixed-line operators which should by then be in place (Telefonica, Retevision and the newcomer shortly to be chosen) will be the only ones allowed to compete nationwide in that segment. The UK telco says it will continue to be present in Spain via its stake in the number two mobile operator Airtel, as well as the closed circuit, business-to-business market in fixed telephony services, BT Telecomunicaciones, and will be studying new opportunities as the market liberalization develops. BT argues that it was not prepared to commit now to a US$650m investment in fixed lines over the next five years, as it prefers to stay on the lookout for more economical ways of expanding its Spanish businesses. It does admit to having no shortage of funds for investment. Indeed, one of the points in BT’s favor cited by Telefonica when it was weighing up the relative advantages of alliances with either the UK telco or MCI, was BT’s healthy reserves available for investment.
Transatlantic alliance
Still, with WorldCom behind it, MCI was also not to be scoffed at, and indeed, proved to be more attractive to the Spanish telco at the end of the day. Telefonica chairman Juan Villanova sought and was granted approval to seek an alliance with MCI at last week’s board meeting. While Telefonica and MCI pursue the goal of a transatlantic alliance spanning the US, Europe and Latin America, BT looks destined, as with Cable & Wireless in 1996, to lose its proposed bride at the altar. It remains to be seen whether it can come up with a cogent strategy in time for Brazil’s sale of Telebras. And we don’t yet know if it can position itself to take advantage of liberalization in Spain without Telefonica. But the big question is whether it can find a partner with the critical mass needed to help it face the greatest challenge of all – the US market.
