C&W set to take pounds 60m hit

As Cable & Wireless suffers from higher US line charges, BT misses out as Spain's Telefonica links up with WorldCom

CABLE & WIRELESS, the UK's second-largest telephone company, is expected to take a $100m (pounds 60m) charge in its accounts this year to cover the cost of an unexpected rise in charges from MCI Communications Corp for using its US phone lines.

MCI, the second-biggest long-distance company in the US, increased charges set in a four-year contract that allows Cable & Wireless to use its US telephone lines. Cable & Wireless contested the change in the terms of its contract in a US court and won. But in an appeal hearing in December, another court ruled MCI was entitled to raise the rates set in the contract. Cable & Wireless declined to comment.

Competition in US long-distance telecommunications has become cut-throat in the last few years, leaving phone companies with wafer-thin margins. British Telecom shareholders asked BT to cut the price it planned to pay to buy MCI last year by 16 per cent, partly because of losses in its long- distance business.

"Pricing pressure is still downwards," said Jeffrey Kagan, president of market research company Kagan Telecom Associates. "The telephone carriers get sensitive because margins are shrinking and they can't afford to lose market share."

Rates paid by consumers for US long-distance calls have fallen by between 63 and 70 per cent in the last 10 years to between 10 cents and 15 cents per minute, said Mr Kagan. Last week MCI announced a plan to allow consumers to buy its long-distance services over the Internet at a reduced rate.

Nevertheless Cable & Wireless's US subsidiary, Cable & Wireless Inc, is one of its fastest-growing businesses. It was a key profit driver in the company's first-half figures with a rise of 22 per cent in operating profit to $39m. Sales, mainly to US business customers, rose 26 per cent to $594m in the period. Cable & Wireless Inc only sells service to businesses.

Cable & Wireless plans to appeal the US court's decision, but the dispute with MCI could take two to three years to resolve.

The charge, which is expected to be taken for the year ending 31 March and will be announced at the time of the results in May, will be more than offset by exceptional gains, including a pounds 519m gain Cable & Wireless made on the sale of a 5.4 per cent stake in Hong Kong Telecom in June and pounds 529m gained after the government renegotiated Hong Kong Telecom's licence. Cable & Wireless owns 52 per cent of Hong Kong Telecom.