The Sun Never Sets On British Telecom

At first glance, British Telecommunications PLC looks as if it has its wires crossed. Just six months ago, BT ditched a once promising investment, Canadian equipment maker Mitel Corp., at a $200 million loss. Then, in early November, it agreed to sell its 20% interest in McCaw Cellular Communications Inc., another supposed long-term investment. And Atlanta-based Syncordia Corp., a subsidiary that manages private communications networks for big corporations, has been slow to take off.

Despite these setbacks, Britain's largest telephone company is hardly in dire straits. BT has ambitious plans to expand, using as springboards its homegrown profits and geographic position between North America and Europe. Iain D. Vallance, 49, BT's chairman since 1987, aims to make his company no less than the world's No. 1 provider of voice, data, and video communications services to corporations--a $250 billion market in which its leading rivals are American Telephone & Telegraph Co. and MCI Communications Corp.

NEW FOCUS. Vallance makes no apologies about the exits from McCaw and Mitel: They didn't fit with BT's new focus, he says. An organization man who came up the ranks from BT's predecessor, the General Post Office, Vallance has a clear sense of how to reshape the sprawling company. He says: "We'll stick to what we do well--running networks and offering services across them." That focus is underscored by BT's newest venture, a $535 million contract to install and operate a private telephone network in Australia for the government of New South Wales.

Vallance's bold run for first place can't be easily dismissed: Finances alone give him a powerful edge. With only $3 billion in debt, and $1.8 billion in cash from the McCaw sale, BT could be debt-free by March, 1994, says Laurence L. Heyworth, an analyst with Robert Fleming Securities Ltd. "Financially, they're the strongest telephone company in the world," he says.

To grab corporate business, BT is plowing $1 billion into a state-of-the-art worldwide network dubbed Project Cyclone. With facilities in 20 of the world's largest cities, it would bypass existing telephone companies to provide intracompany services for multinationals. BT is already setting up switching centers for Cyclone in London, Frankfurt, New York, and Sydney. Getting regulatory approvals in each country where Cyclone is planned will delay full operation until the year 2003. Nevertheless, Cyclone is putting BT "way ahead of the game," says Roger J. Camrass, a director of Arthur D. Little Ltd. in London.

Until then, BT is taking on AT&T and other international carriers with a wide array of services. Syncordia, set up a year ago, will assume complete control of a client company's global telecommunications, often by taking over an existing in-house network. But growth has been slow, and competition is increasing in Europe as the Germans and French, as well as the Dutch and Swedes, have teamed up to form similar ventures. Syncordia now manages networks for only four companies, including IBM Europe and BP Chemicals Inc.

BT also owns Tymnet, a low-speed data-transmission service it purchased from McDonnell Douglas Corp. in 1989 for $300 million. Tymnet is being meshed with BT's ubiquitous Global Network Services, which provides data transmission in 1,000 locations around the world.

These global efforts are being launched from a strong home base. With 93% of Britain's local and long-distance market, BT is expected to show earnings of $4 billion on revenue of $20 billion in the year ending Mar. 31. That's after a $591 million charge from the elimination of 45,000 jobs. The staff cuts, says Yankee Group Europe analyst Sean Phelan, "are all part of a long-term plan to convert from a hidebound, state-owned monopoly to a full-service, competitive player worldwide."

CHALLENGERS. BT is taking a risk, however, by going its own way in most initiatives. That Lone Ranger attitude could hurt as telecom begins loosening up in Europe, where state-owned cartels still control most markets. The European Commission already is allowing competition in such niche markets as videoconferencing and private data networks. When international voice calls are added to the package, Phelan's Yankee Group foresees a price war, with BT, France Telecom, and Deutsche Bundespost Telekom, as well as AT&T, MCI, and Sprint, battling over big corporate customers.

BT's gravy train could also derail in Britain. Mercury Communications, the Cable & Wireless PLC subsidiary that has been a feeble competitor in phone service, has a new partner. The purchase of 20% of Mercury by BCE Inc., the big Canadian telecom group, is expected to make it a more formidable foe.

Cable-TV companies are luring away BT customers, too. Rules allow them to carry both entertainment and voice communication. After a slow start, cable-TV rivals now have 400,000 customers and are picking off 10,000 BT users a month. U.S. West Inc. has joined with Tele-Communications Inc., a Colorado-based cable-TV company, as the biggest player. "For the first time in its existence, BT can see, feel, and touch challengers in the U. K.," says Richard Woollam, director of the Cable Television Assn., a London-based trade group.

Since privatizing in 1984, BT has come a long way from its stodgy, state-owned past. But it still needs to introduce new technology and shrink staff--without hurting customer service in its now competitive home market. And it faces stiff competition for multinational corporate clients, which have more options than British users. As a global player, BT still has some connections to make.

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