Cable & Wireless plans acquisitions to boost UK operations

Cable & Wireless, the country's second-biggest telecoms company behind BT Group, is evaluating the strategic options for its UK operations and is considering acquisitions to bolster the company's domestic presence.

It is understood to have examined a bid for Thus, its smaller rival, but has made no approach. However, it has also looked at acquiring Energis, a much larger rival to Thus, which would transform C&W's UK business in terms of scale.

Energis operates in similar areas to C&W in supplying voice, data and internet services to business customers as well as operating in areas such as directory inquiries. Such a deal would require C&W taking on £670m of Energis' debt.

C&W's domestic operations will be thrown into the spotlight this Thursday when the company delivers its third-quarter trading update. Some analysts are expecting Richard Lapthorne, the chairman, to announce close to zero revenue growth in the UK and warn investors that trading conditions remain difficult. The company will also give a business development update on the progress it has made in restructuring its UK business and is expected to say it has achieved 900 redundancies out of a forecast 1,500.

But C&W believes there is still value in its UK operations, which are its largest revenue generator, producing £1.7bn last year. Its regional division, mainly operating in the Caribbean and Panama, generated £1.4bn.

C&W has considered possibly splitting the UK and regional operations into two entities. JP Morgan, the investment bank that is advising C&W on strategy, is understood to favour a drive to consolidate the UK market where analysts believe the company needs to prove it can make progress against the dominance of BT.

On Friday C&W completed its exit from a disastrous foray into the US with an agreement to sell its American operations to Savvis Communications for $155m. The proceeds will go to C&W's US creditors who are owed money on property leases signed by C&W for its data-hosting business.

But having got out of America and with the company's year-end approaching, the focus has been thrown back on C&W's UK business and analysts believe the company's only realistic option is to boost growth through acquisition.

On Friday analysts at Morgan Stanley lowered their share price target on the company from 115p to 110p, compared with Friday's close of 148p. The Morgan Stanley research said: "We believe that 2004 could see tougher times for C&W."