C&W cash boost after settlement of £380m tax liability

Shares in Cable & Wireless shot up 22 per cent yesterday after the telecoms company resolved an outstanding tax bill with the Inland Revenue in a move that will see £1.1bn of cash flow back into the group's coffers.

Cable & Wireless has paid the Inland Revenue £380m to cover "all previously unsettled matters" regarding UK corporation tax for the 10-year period to 31 March 2001.

Crucially, the settlement means that £1.5bn of cash, which the company had been forced to place into an escrow account earlier this year to cover a potential tax liability, will be freed up. Shares in Cable & Wireless rallied sharply, closing up 22 per cent, or 13.25p, at 73.25p, making the stock the biggest riser in the FTSE 100 index yesterday.

"Establishing clarity over the group's tax position was an essential element in our planning for the future financial shape of the group. With the settlement in place and consequent anticipated release of funds under escrow we now expect to have a firm financial base for securing the future of the company," Richard Lapthorne, the chairman, said.

The £1.5bn of cash is expected to be released within weeks while the £380m it has paid out will not appear as an exceptional item in the accounts since it has previously been provided for.

Cable & Wireless would not comment yesterday on what the £380m tax bill covered other than to say it related to the tax affairs of "over one hundred companies" – some which it still owns and some which have been sold – over that 10-year-period. It is thought an element covers the sale of its 50 per cent stake in the mobile phone operator One2One, now called T-Mobile, although the company said it was still not accepting any tax liability had arisen from that deal.

Cable & Wireless was forced to ringfence the £1.5bn of cash thanks to a tax indemnity it had given to Deutsche Telekom when it sold the German telecoms group its share in One2One for £3.45bn in 1999.

Under the terms of that deal, C&W agreed to protect Deutsche Telekom from any future tax liabilities relating to the disposal and agreed that, should its debt rating fall below "Baa" status, it would ring-fence the cash or get a guarantee. A credit rating cut by Moody's last year triggered the agreement and forced Cable & Wireless to flag the liability and put the money into an escrow account. Moody's said yesterday's deal was positive for Cable & Wireless but said that it was maintaining its ratings on the company for the time being.