Cable & Wireless fails to impress with Internet strategy as profits fall in HK

GRAHAM WALLACE, chief executive of Cable & Wireless, yesterday clarified the group's Internet business strategy, while unveiling a sharp drop in interim earnings after an expected profits downturn at its majority- owned Hong Kong unit.

Group pre-tax profits in the half to September fell by one-third to pounds 539m, although sales jumped 25 per cent to pounds 4.51bn. Tougher competition for C&W Hong Kong and spending on digital services at C&W Communications largely accounted for the earnings downturn.

Mr Wallace said the Hong Kong market was stabilising. "In terms of the really aggressive reduction of international calling rates we have seen the worst," he said.

Mr Wallace turned aside suggestions that fears about the aims of the Chinese government - which through state-owned China Telecom holds 10 per cent of C&W Hong Kong - had hurt the stock's performance. "They behave very much like commercial shareholders," he said.

Despite a detailed presentation to City investors on C&W's moves to focus on the Internet business services market, the company's stock slid 18.5p to 665p. That put the stock near 12-month lows, during which period it has underperformed the booming telecoms sector by 40 per cent.

"Essentially they are going head-to-head with WorldCom, Sprint and Colt Telecom," said an analyst. "The question is: can they pull it off? People aren't giving them the benefit of the doubt; there's a wait-and-see attitude."

In eight months Mr Wallace has spearheaded disposals that will realise over pounds 8bn once the C&W residential business sale to NTL is concluded in March.

C&W is to invest pounds 3bn this year and pounds 2.5bn in fiscal 2001 to transform itself into a leading global Internet business services player. It aims to become a major supplier of network access to Internet service providers, as well as of Web hosting facilities and other Internet protocol communications products. "We're not doing this on the basis of some consultant's forecast," Mr Wallace said. "We've got the customers already. It's real demand."

In a further realignment, C&W Hong Kong unveiled a joint venture to pool its Internet access and digital broadband business with Star TV, the Asian satellite broadcasting platform owned by Rupert Murdoch's News Corp. C&W Hong Kong will own 60 per cent of the as yet unnamed venture, and Star 40 per cent. A stock flotation in Hong Kong and on Nasdaq is expected next year.