C&W's ticket out of US set to cost £1.6bn

Cable & Wireless's retreat from the US could see its entire £1.6bn cash reserve wiped out, plunging the company into a fresh crisis.

Cable & Wireless's retreat from the US could see its entire £1.6bn cash reserve wiped out, plunging the company into a fresh crisis.

Potential bidders reached this conclusion after reading C&W's prospectus on the businesses, distributed earlier this month.

Produced with the help of investment bank Greenhills, the document provides detailed financial information on the three US businesses - Exodus, Digital Island and the former MCI cable network.

If C&W is forced to close these businesses, sources who have studied the information believe that covering its liabilities, which include many property leases, will cost around £1.6bn. "The costs could exceed the cash it has in the bank," said one senior private equity industry source.

City analysts had previously estimated that it would cost £700m to close the US operation. Richard Lapthorne, C&W's new chairman, has refused to put a cost on the exit for fear of prejudicing the sale.

C&W is still hoping to find a company that would be willing to take the US businesses off its hands. One source said that because of the liabilities, C&W would have to pay a potential bidder up to £800m. On top of this, the businesses aren't expected to break even for at least two years, based on optimistic projections. So whoever bought the companies would have to commit to spending millions to keep them going.

Some bidders may consider putting the businesses into Chapter 11 bankruptcy protection so that restructuring could take place without pressure from creditors.

Earlier this year, Level 3 Communications, a US telecoms company, held talks with C&W about buying the businesses or forming a joint venture. But Level 3 is thought to have pulled out over concerns about the liabilities.

US telecoms companies Verizon and SBC Communications are also thought to be examining C&W's prospectus.

C&W's problems are a hangover from the regime of its former chief executive, Graham Wallace, who lavished £9bn on companies in the US. He predicted a sudden upsurge in demand for telecoms services related to the internet but his expectations were too optimistic.