British telecoms operator Cable & Wireless (C&W) is in talks to buy privately owned rival Energis in a deal tipped to be worth about £700 million (€1 billion), sources familiar with the situation said yesterday.

However, negotiations are at an exploratory stage and it is too early to say whether they are likely to lead to a deal, the sources added.

C&W, Britain's second-largest fixed-line operator, is expected to use part of its £1.34 billion in cash to help finance any deal, which analysts say will need to reward Energis's management, who were appointed to rescue the group in 2002 when it was taken private.

News of the talks helped push up shares in C&W as equity investors welcomed reports of consolidation in Britain's telecoms market ahead of much-needed investment in new networks.

However, other concerns focused on the possibility that C&W's cash pile - available to service debt - could be eroded.

"It's a company with pretty poor fundamentals... but it's got lots of cash," said one bond trader. "Now it's not so much of a no-brainer as it was."

C&W, whose 133-year-old empire once spanned Europe, Hong Kong and the US, has long been tipped as both a bid target and a predator in the UK, partly because of its cash pile.

The company rejected takeover overtures from Hong Kong carrier PCCW in February 2003, just days after Richard Lapthorne was appointed chairman to revive the fortunes of a group whose shares were languishing near record lows.

With the market facing overcapacity and crashing prices, C&W began a radical overhaul, pulling out of loss-making businesses in the United States and Japan and cutting thousands of jobs. It returned to net profit last year.

The company, which has long been backed by long-term adviser JP Morgan, declined to comment. Energis, which is being advised by NM Rothschild, also declined to comment.