Cable & Wireless has finalised a deal worth up to £674 million to take over Energis, boosting its competitiveness against BT Group and paving the way for an expensive wave of investment in the combined company's networking infrastructure.

Energis' owners, a group of banks and financial institutions, sealed the bargain on Monday night after the last-minute drama of an unexpected bid from Scottish telco Thus, which with a market value of about £212m is a quarter of Energis' size. Thus made its £800m bid public on Monday in an apparent attempt to take advantage of a rebellion by a group of Energis debt holders, who were pressing C&W for a better offer.

C&W, with a market valuation of about £3.9bn, refused to change its offer, and in the end Energis' owners opted for the safety of the larger company's bid. Going with Thus would have required carrying out due diligence and would have brought in all the integration problems of a reverse takeover. Thus, the former telecoms arm of Scottish Power, has never completed a major acquisition.

C&W said it would pay £594 million in cash and up to £80 million in cash or shares three years after completion.

Industry analysts have long expected further consolidation in the UK's telecoms sector - in fact Thus is considered a likely takeover target. Prices have continued to drop in the face of intense competition and new technology such as IP (Internet protocol) telephony, and at the same time expensive modernisation investment is seen as a necessity.

BT, for example, has made a great fanfare over its 21CN (21st Century Network) project, which will give the nationwide network IP capabilities. C&W is the UK's second-biggest provider of fixed-line telephone services. Energis has focussed solely on the corporate market in recent years, and brings with it big customers such as the BBC and Tesco.

C&W said it plans to use the acquisition to bolster its IP services and competition in areas like local loop unbundling. "The timing of this acquisition allows us to exploit the rapid growth in demand for IP-based services and the opportunities presented by the creation of a regulatory framework designed to facilitate infrastructure-based competition," said C&W chief executive Francesco Caio in a statement.

C&W says the Energis acquisition will give the company a wider cost base, giving it more opportunities to cut expenses. The merger will mean £55 million per year of operating and capital cost savings for 2006-2007, rising to £80 million for 2007-2008, C&W said. It estimates the cost of integration will be around £75 million to £100 million.

Part of the cost-savings equation will be staff cuts, with C&W saying it plans around 700 job cuts in the next three years. Energis employs 1,500 at its Reading headquarters and Leeds, London, Dublin and Belfast offices, with C&W employing 4,500 in the UK.

John Pluthero, Energis chief executive and founder of Freeserve, is expected to join C&W, while Energis chairman Archie Norman is to resign from the business.