Market Report: C&W goes up, then down, amid break-up talk

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The Independent Online

Will Cable & Wireless be broken up? Analysts at Citigroup certainly believe it should be, issuing a research note that got dealers excited at the prospect yesterday.

Will Cable & Wireless be broken up? Analysts at Citigroup certainly believe it should be, issuing a research note that got dealers excited at the prospect yesterday.

The broker believes that a demerger of the high-risk UK business "has the potential to transform the investment case" for the telecoms company, which led it to raise its rating on the stock from neutral to buy.

Citigroup painted a bleak picture of the core UK business, where it provides an "alternative" network to the incumbent, BT. "The UK alnet business has destroyed an unprecedented amount of value over the past decade," the broker said, adding that £6.1bn invested in network assets now stands in the company's books at just £298m. The UK entity is of "poor quality" and in long-term decline.

The worry is that the £1.4bn cash pile that C&W is sitting on, raised from disposals, will be also thrown at the UK business. Although C&W's other operations, which are telecoms operations in the Caribbean, Japan, Panama, Europe and many other countries, are also under attack from competition but are less risky.

The solution therefore lies in hiving off the UK business and focusing on the National Telcos assets. C&W would need to leave the UK interests with some cash - Citigroup suggests a "dowry" of £200m - but the rest of the money would be protected and shareholders would be left with separate shares in a business with better prospects.

According to the broker C&W at last has a management which is at least asking the rights questions. The company's shares raced up 2.5p during the day, at one stage leading the FTSE 100 leader board. However, the stock ended the day down 0.25p at 97.75p as investors said that the C&W management had shown no inclination to go for a break-up and, failing that, Citigroup's analysis was pretty damning.

The FTSE 100 dropped 37.60 points to 4,647.90, its steepest decline in a couple of weeks. Bad news from the likes of the housebuilding sector led investors into defensive stocks such as Imperial Tobacco, which ended the day as the best FTSE 100 performer, up 23p at 1,248p.

However, there was some confidence in the retail sector, after a report from the British Retail Consortium for September which showed the ongoing resilience of the consumer. Despite a poor trading update from Marks & Spencer, which gained 4.5p to 347.5p, there was some cheer from the fact that the retail giant said clothing sales were up slightly. Next was up 11p to 1,700p, helped by the broker UBS raising its price target from 1,800p to 1,975p. Kingfisher gained 4.5p to 313.25p, Morrison Supermarkets 1.25p to 194.5p, GUS 2p to 902p, Carpetright 10p to 1,075p, Carphone Warehouse 1.25p to 153p.

Reuters had another bad day, ending down 12p at 327.5p. Although its chief executive, Tom Glocer, has gone out of his way to try to appear upbeat about the company's prospects - in a leaked internal memo last week - the City remains sceptical. The financial information and news group will put out a third-quarter trading update next week. According to a note yesterday from Investec Securities, core revenues will be down 14 per cent for the quarter. There will be much interest in Reuters' outlook comments for 2005. Investec suggested that after having to rein in more optimistic projections earlier this year, "we suspect the company will want to try to keep a lid on forecasts". The problem Mr Glocer faces is keeping his staff motivated while giving an external message that will not see investors getting carried away with the rebound story. proved a curiosity of the day's trading. Rumours swirled of a negative note from the broker Collins Stewart, which together with the end of bid speculation, saw the shares drop 8p to 109p. There was a briefing for analysts last week. The company swung into action. According to a spokeswoman, no such note exists and in fact Collins Stewart has not put one out for 18 months. The broker are no longer followers of the company, according to the spokeswoman.

Elsewhere in the travel sector, the high cost of fuel continued to worry investors in airlines, as the price of crude oil hit new highs . British Airways lost 5.25p to 199.5p, easyJet was 2.75p lower at 121p, while the Irish carrier Ryanair fared a little better, down just 1 cent at 369 euro cents. According to the broker Dresdner Kleinwort Wasserstein, Ryanair's relatively healthy margins provide some insulation.

Although miners have proved a favourite in recent months, on the back of soaring commodity prices, there was some concern that metal prices have not much further to go. That mean Xstrata lost 27.5p to 899.5p, BHP Billiton, 13.5p to 599.5p, Anglo American 24p to 1,303p and Rio Tinto 27p to 1,503p.