C&W in a game of catch-up

With the Vodafone deal done and dusted, Cable & Wireless could be the next hot tip in telecommunications, writes Peter Koenig

AS CABLE & WIRELESS senior management retreated to a conference centre west of London 10 days ago to discuss strategy, they had a wall of bad news to confront.

Since the company broke off talks with Telecom Italia in November, analysts have brickbatted C&W for not knowing what it is doing in continental Europe. C&W's Hong Kong Telecom subsidiary, once a monopoly and cash cow, faces an uncertain future now that Peking runs the former colony and the telecoms business there is being opened up to competition. On 10 December, C&W was sent reeling when Dick Brown, its deal-making Texan chief executive, peremptorily announced he was quitting to return to Texas to run Electronic Data Systems Corp. And almost literally as C&W's bosses, led by chairman Sir Ralph Robins and acting chief executive Rodney Olsen, drew up in their cars, a rumour hit the City that Deutsche Telekom, the privatised German telecommunications group, was going to mount a takeover bid.

"We didn't talk about any of that," says Stephen Pettit, C&W's executive director for global business, "although we did touch on the management issue."

So what did they talk about?

"Making sure our internet business was on track. Making sure the development of our global network was on track. Making sure that we were delivering on the promises we've made to our customers."

A Terry-Thomas look-alike, Pettit is blessed by an instinct for understatement, which is refreshing in the context of the roaring telecoms industry. Pettit, indeed, sounds convincing when quietly arguing that C&W is undervalued by investors. So convincing, indeed, that investors appear to be waking up to the possibility that C&W is an overlooked value play in the heavily worked-over telecoms sector.

Lagging behind the UK telecoms index by some 40 per cent over the last year, C&W shares have stopped slipping since the management meeting and performed on a par with the index last week.

An analyst from Henderson & Crosthwaite, Paul Sharma, says: "C&W has a market capitalisation of about pounds 20bn. Orange has a market cap of pounds 10bn. Comparing the share prices and assets of the two companies, I think you have to say C&W is undervalued."

In a mini-outburst, Pettit rails against the stock market's love affair with newcomer telecoms companies ranging from giant MCI WorldCom to smaller fry like Colt and the recently merged Esprit and Global Telesystems Group.

"Why do these companies get the hype?" he explodes. "Because they show lots of revenue growth. But they don't show earnings growth. In some cases they don't show any earnings at all."

Pettit acknowledges that, because of intense competition, C&W's own earnings may be flat in 1999. A fortnight ago, for example, Hong Kong Telecom slashed prices on its mobile phone services by as much as 70 per cent to protect its position in the liberalising local market. At the same time, however, Pettit stands by the strategy C&W has pursued for the past three years to secure its footing in the pounds 300bn-a-year global telecoms industry.

C&W is an "old-world" telecoms company - just as BT and AT&T are - as opposed to "new-world" telecoms companies like MCI WorldCom and Equant. They have built totally new businesses in recent years on the back of deregulation, privatisation, and new technology.

Howard Ford, head of European operations for Equant Network Services, says: "We can sign high-level service agreements with customers because we have one seamless global network based on the internet."

As an old-world telecoms firm, C&W has the advantage of an existing client base (17 million customers in 70 countries), being the third-largest supplier of international phone services behind AT&T and Deutsche Telekom, and control of a twelfth of the world's undersea phone lines.

But it also has an old-world management which grew up when telecoms was a monopoly business focused on selling voice communication, not internet services or cable television. C&W also has a higher cost base than a company like MCI WorldCom. Many of its switches - the devices routing phone traffic - are outdated and inefficient. New-world switches are cheaper to operate because they package voice as well as data traffic into compressed digital signals, then send them in packets down lines making more efficient use of line capacity.

"The internet is not a business," says Pettit. "It is a facilitating technology. When I talk to customers, I don't talk to them about the internet. I talk to them about hooking up computers in the home to the office, and eventually televisions in the home to the office."

But, he concedes, the strategy of C&W is to make the transition from old world to new. The challenge is to do this faster and more efficiently than other old-world telecoms firms making the same journey. C&W must also fight off new-world telecoms firms such as MCI WorldCom seeking to steal its customers by offering them cheaper services based on a lower cost of doing business. Competition in the industry is ferocious.

"Deutsche Telekom is making [this] transition successfully," says a spokesman for Deutsche Telekom. "We are doing this because Germany is the most deregulated national telecoms industry in the world."

James Richardson, head of European operations for Cisco - the California- based manufacturer of internet routers, the devices gradually replacing traditional phone switches - says: "The battle is all about timing."

C&W must time its investments to move from old switches to internet- protocol ones, while also laying increased-capacity fibre optic cable, and "migrating" its many national networks into one global network. Judging how well Pettit and his colleagues are performing this task in comparison with the efforts of its competitors goes to the heart of valuing C&W. The stock market is looking at the easy numbers in contrast with the harder business of getting to grips with this analysis, Pettit believes.

However, Pettit cites various numbers when arguing that C&W is making the transition from old world to new. Reconfiguring its Atlantic and Pacific cable networks, he says, will allow C&W to save between pounds 50m and pounds 100m over the next few years. Reconfiguring the company from a federal network of many companies into one company with one global brand being sold by one sales unit to top-of-the-line corporate customers, Pettit says, C&W lined up pounds 500m in new business between January 1998 and this month. One new customer is Chase Manhattan. Another is a major US information technology company. "We increased our [top-line sales] hit rate from one- out-of-10 to four-out-of-10," he says.

Pettit also cites corporate moves - chiefly the pounds 1.1bn purchase of MCI's internet business in the US last year after WorldCom acquired MCI and had to sell MCI's US internet business - with its 3,000 corporate customers - to satisfy US anti-trust regulators.

"This puts us top of the [pecking] order in the US," says David Wickham, chief executive of C&W's global network. Wickham explains, this means that C&W pays few interconnection fees for internet traffic to other US telecoms companies, while many of those US companies pay fees to it. Pettit also points out that two weeks ago C&W bought the German internet provider ECRC Network Services for pounds 27.5m.

"We not only bought a business," he says, "we also bought 60 people who've been involved in the internet in Germany since the start."

Assessing Pettit's claims is very difficult. But no less an authority than Cisco's Richardson backs them up. "C&W has massive international prospects," he says. "They're very, very well positioned."

Responding to the argument that C&W is exposed in Hong Kong, where it generates nearly 40 per cent of its sales, Pettit says that C&W is gradually cementing good relations with China's leaders in Peking.

Cisco's Richardson again endorses C&W's step-by-step strategy.

Henderson Crosthwaite's Sharma, meanwhile, argues that there are a variety of steps C&W could take to increase its appeal to shareholders. "In One2One it has an excellent mobile phone business. It could float that."

If C&W is so under-valued, isn't Deutsche Telekom or someone else going to make a bid for it? Pettit has an understated chuckle. "There have been bid rumours ever since I got here," he says.

Start your day with The Independent, sign up for daily news emails
News
The cartoon depicts the UK (far left) walking around a Syrian child refugee
newsIn an exclusive artwork for The Independent, Ali Ferzat attacks Britain's lack of 'humanity'
Life and Style
Man taking selfie in front of car
health
Sport
footballManager attacks Sky Sports pundit Jamie Redknapp after criticism of Diego Costa's apparent stamping
Life and Style
food + drink
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Web Developer - PHP

£16500 - £16640 per annum: Recruitment Genius: This fast growing Finance compa...

Ashdown Group: Client Services Manager - Relationship Management - London

£30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...

Recruitment Genius: Credit Controller / Customer Service

£18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...

Guru Careers: In-House / Internal Recruiter

£25 - 28k + Bonus: Guru Careers: An In-house / Internal Recruiter is needed to...

Day In a Page

Greece elections: In times like these, the EU has far more dangerous adversaries than Syriza

Greece elections

In times like these, the EU has far more dangerous adversaries than Syriza, says Patrick Cockburn
Holocaust Memorial Day: Nazi victims remembered as spectre of prejudice reappears

Holocaust Memorial Day

Nazi victims remembered as spectre of prejudice reappears over Europe
Fortitude and the Arctic attraction: Our fascination with the last great wilderness

Magnetic north

The Arctic has always exerted a pull, from Greek myth to new thriller Fortitude. Gerard Gilbert considers what's behind our fascination with the last great wilderness
Homeless Veterans appeal: Homeless in Wales can find inspiration from Daniel’s story

Homeless Veterans appeal

Homeless in Wales can find inspiration from Daniel’s story
Front National family feud? Marine Le Pen and her relatives clash over French far-right party's response to Paris terror attacks

Front National family feud?

Marine Le Pen and her relatives clash over French far-right party's response to Paris terror attacks
Pot of gold: tasting the world’s most expensive tea

Pot of gold

Tasting the world’s most expensive tea
10 best wildlife-watching experiences: From hen harriers to porpoises

From hen harriers to porpoises: 10 best wildlife-watching experiences

While many of Britain's birds have flown south for the winter, it's still a great time to get outside for a spot of twitching
Nick Easter: 'I don’t want just to hold tackle bags, I want to be out there'

'I don’t want just to hold tackle bags, I want to be out there'

Nick Easter targeting World Cup place after England recall
DSK, Dodo the Pimp, and the Carlton Hotel

The inside track on France's trial of the year

Dominique Strauss-Kahn, Dodo the Pimp, and the Carlton Hotel:
As provocative now as they ever were

Sarah Kane season

Why her plays are as provocative now as when they were written
Murder of Japanese hostage has grim echoes of a killing in Iraq 11 years ago

Murder of Japanese hostage has grim echoes of another killing

Japanese mood was against what was seen as irresponsible trips to a vicious war zone
Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

Celebrities call on David Cameron to take more Syrian refugees

One young mother tells of torture by Assad regime
The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

The enemy within

People who hear voices in their heads are being encouraged to talk back
'In Auschwitz you got used to anything'

'In Auschwitz you got used to anything'

Survivors of the Nazi concentration camp remember its horror, 70 years on
Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

Autumn/winter menswear 2015

The uniforms that make up modern life come to the fore