C&W pledges new start as internet losses top the £6bn mark

Dream of global network abandoned as Cable & Wireless grasps nettle and quits US
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The Independent Online

Cable & Wireless yesterday began a massive restructuring programme that will see it pull out of the US and lose 1,500 jobs in the UK as it reported losses had widened to a record £6.4bn.

Furthermore, dividend payments are being suspended for a year to help the company save money that will pay for the whole exercise - something analysts reckon could cost £700m.

The company's new management are dismantling the entire strategy put in place by former chief executive Graham Wallace - a strategy in which the company invested about £9bn in the US alone.

Sketching out a three-year turnaround plan, new chief executive Francesco Caio conceded there was a "long and risky" journey to travel. He is confident, however, that Cable & Wireless has a long-term future.

Under Mr Wallace's stewardship, Cable & Wireless issued four profit warnings as trading deteriorated. It also admitted to a potential £1.5bn tax liability which only came to light after a credit ratings downgrade.

In a bid to start afresh and put the past behind it, the new team is intent on changing just about everything at the business from the way it is structured, right down to the kind of profit and loss numbers it uses when reporting its figures.

It is abandoning its old 'regional' and 'global' reporting divisions in favour of looking at the business on a country by country basis and will also stop referring to EBITDA, or earnings before interest, tax, depreciation and amortisation - a measure chairman Richard Lapthorne described as "seriously dangerous" yesterday.

In the year to 31 March, Cable & Wireless reported a pretax loss of £6.4bn after exceptional charges compared with a loss of £4.5bn a year before. But on an underlying, or Ebitda, basis, the company turned out a profit of £334m.

Shares in Cable & Wireless reversed early losses to close up nearly 7 per cent at 103.5p - the second biggest riser in the FTSE 100 index - as the City took a more positive view on the company's future prospects.

However, the road to recovery will not be an easy path to tread. Mr Caio painted a depressing trading picture yesterday of flat to declining overall demand and said overcapacity was here to stay while pointing out that almost all the profit in fixed telecoms networks was in the local loop.

With that in mind, he says Cable & Wireless will focus on where it thinks it has a decent chance - offering core telecoms services in the UK - where it is the number two after BT -- and other markets where it has a decent position.

Given Cable & Wireless' weak performance in the UK, it is hardly surprising to see it taking the axe to costs. Sales fell 16 per cent in the year to £1.7bn while staff costs fell just two per cent. Worse still, the UK made an operating loss of £303m.

Consequently, Mr Caio has decided around 1,500 jobs will go in the UK over the next two years out of its 5,500 strong domestic workforce. The cuts are on top of the 3,500 job losses it announced last November.

The new strategy also means it is curtains for the US business. C&W has invested about £9bn in the US including the acquisition of MCI in 1998 and, more recently under Mr Wallace's stewardship, the purchases of web hosting firms Digital Island and Exodus.

Yet, of the £2.9bn of revenues it gets from what it currently calls 'Global', only seven per cent are truly the type of customer Mr Wallace had in mind, it reckons. The firm made an operating loss of £255m in the US on revenues of £512m.

"Our US subsidiaries make losses, consume cash and require significant management attention. Both hosting and IP services are businesses which have limited interaction with the rest of the group and are not central to our plans," said Mr Caio. While he said they "might" have value "to the right owner", he said they were "not sustainable" for Cable & Wireless.

Over the past two years, the company has written off its £9bn investment in the US. All exit options are now being considered although it is at pains to "withdraw in the most cost effective way possible".

When all the restructuring is done, Cable & Wireless reckons it will be left with a business that turns over about £3.5bn a year, generating a double digit operating profit margin.

In the meantime, however, there are still many unanswered questions -- not least any kind of estimate of what the cost of the restructuring exercise will be.

The credit ratings agency Moody's yesterday put Cable & Wireless' ratings under review for possible downgrade. It has concerns not only about the unquantified restructuring costs but also about execution risks and the prospects for the remaining businesses.

Cable & Wireless insists, however, that it has sufficient resources to carry out all the work it needs to on the turnaround. The dividend suspension - it is not paying a final dividend or a first half dividend -- will save it about £140m. It is planning to pay a final dividend in the current year.

But there are still a number of other outstanding nasties. Yesterday's statement revealed a pensions black hole of £430m under the accounting standard FRS17 as at 28 May.

C&W also announced that "significant" claims had been made against Pender Insurance, an insurance unit never mentioned before, which it plans to "defend vigorously". Then there are the property and operating lease costs - now estimated at about £1.6bn - down from £2.2bn at the end of last September.

In addition, the firm has yet to finalise both Mr Wallace's and Robert Lerwill's pay-offs - both of whom were on two-year contracts. Mr Wallace is, in theory, entitled to at least a £1.55m handout. Mr Lerwill, whose departure was announced yesterday, was paid around £400,000 in salary and fees last year alone.

The plus point, as ever, remains the company's £1.6bn of cash and Cable & Wireless is determined to conserve the money and to cut capital expenditure.

There must also be a high degree of comfort in the impressive new board that Mr Lapthorne has assembled. Graham Howe, the former deputy chief executive of the mobile phone operator Orange, was last week named as a non-executive director.

Cable & Wireless also said yesterday that Royston Hoggarth, who is currently head of LogicaCMG's international business, was joining as chief executive of Cable & Wireless UK.

For the first time in years, Cable & Wireless looks to have come up with what seems to be a sensible strategy and one, given the near seven per cent rise in the share price yesterday, that is at last being reasonably well received by investors.

But as Mr Caio concedes, the firm's road to recovery will not be an easy one and Cable & Wireless has yet to prove that the business it will be left with will make money.