Thus and C&W in merger talks

Cable & Wireless and Thus were locked in discussions late last week for the first time since late C&W set a deadline on its £302 million indicative offer for the Glasgow telecoms group.

The talks prompted speculation that the London-based telecoms giant had raised its offer.

On the eve of C&W's deadline, set for 5pm tomorrow, for deciding whether to table a formal offer for its rival, observers blamed the credit crunch for Thus's failure to launch an aggressive counter-offensive.

Thus chief executive Bill Allan was in London on Friday, and sources said face-to-face "communications" were now taking place between Thus and C&W. "There are conversations happening. Things are moving in real time. There is now engagement from Thus when there wasn't before," said one insider.

Since this reverses Thus's previous position that it would not enter into talks with C&W, analysts interpreted the shift as meaning that C&W had put more cash on the table.

"That would be my assumption," said one telecoms specialist who declined to be named. "It was always what I expected to happen anyway."

Thus shares had lost He since last Wednesday to pointed to the fact that almost 10% of their value close the week at 145p, indicating that the market did not think a deal was going to happen at C&W's 165p-per-share offer level. Thus is rumoured to believe that an offer well in excess of 200p would be necessary to reflect the value of the company.

In a takeover battle that has now been running for a month, C&W wants to acquire Thus for its synergies in infrastructure and staffing and its next-generation network, and to reduce the number of competitors in the sector.

Bill Allan, who himself worked for C& management, has developed W for 25 years and is understood to anharbour a bitter sense of rivalry towards its acquisitive reputation through Thus's purchases of rivals Your Communications and Legend Communications, as well as its opportunistic move on Energis in the past couple of years.

Some observers have suggested Thus might have tried to distract attention from the C&W bid by launching a takeover move of its own, rather than simply disdaining its rival's offer.

Mike Jeremy, an analyst at investment bank Daniel Stewart, said the credit crunch will have contributed to Thus's failure to launch any counter-offensive, combined with the lack of viable targets.

One corporate financier who preferred not to be named added: "Companies' current struggle to raise debt from the banks will mean that Thus's defence manual is very thin." Another countered that Thus had a good reputation with its bankers and had low debt. "For the right company there are debt-financing opportunities out there," he said.

Jeremy added that he believed that there could well be more than one bidder after it was reported last week that rivals Colt Telecom and Global Crossing had been in touch with Thus's advisers to express an interest.

"I do think there's going to be an auction. These things often go right up until the deadline. Investors won't see until then how serious any counter-bidders are," he said.

Collins Stewart analyst Mark James cautioned against thinking C&W would be determined to do a deal at any price. "I can envisage a deal at 190p but in C&W you have quite a hard-nosed management team that is prepared to leave it," he said.

Thus announced a maiden operating profit this year, having focused on investment in the decade since it was demerged from Scottish Power, originally under the Scottish Telecom brand. Although it has made investors wait a long time for a return, several analysts said they did not think the board was under great pressure to sell out.

A C&W spokesman refused to comment on whether the company had raised its indicative offer, while Thus also refused to comment.

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