C&W agrees to takeover talks with Li

Richard Lapthorne, chairman of Cable & Wireless, will this week signal he is prepared to open talks with the Hong Kong tycoon Richard Li about the possible sale of the struggling telecoms business.

The news will come just over a week after Mr Lap-thorne rejected an informal approach from Mr Li for the 131-year-old company, which has seen 93 per cent of its value evaporate over the last two years. Mr Lapthorne, the former finance director of BAE, joined as chairman only last month.

Mr Li, through his telecoms and internet company, PCCW, is also this week expected to renew the offer to buy C&W. Industry sources revealed that he will make a 100p-a-share cash offer, which is a 35 per cent premium to C&W's current price. It will value C&W at £2.4bn.

PCCW has teamed up with Texas Pacific, the US venture capital group. Both parties will contribute roughly half of the money for the bid. PCCW, which has debts of US$4bn (£2.5bn), is understood to be planning to pay for the bid through bank debt.

Despite this, C&W is expected to tell Mr Li that any bid discussions can only proceed on an unconditional basis.

C&W holds 14 per cent of PCCW's shares as a result of the sale of Hong Kong Telecom to Mr Li in 1999. In his initial takeover approach, made on 31 December to C&W's former chairman, Sir Ralph Robins, Mr Li stipulated that the company must agree not to sell its shares in PCCW if discussions proceeded. If C&W did sell, it risked undermining PCCW's share price. Privately, C&W is suspicious that Mr Li used the condition as a tactic to maintain short-term stability in PCCW's share price while he sought other bid targets. Mr Li has made no secret of his plans to buy undervalued telecoms and technology businesses.

However, PCCW has readied itself for a full-scale C&W takeover bid. It has hired investment bank Goldman Sachs and has already agreed with Texas Pacific on how to carve up C&W if its offer is accepted.

Texas would take over most of C&W's loss-making US operations while PCCW would control the company's cash-generating regional business, which has operations in areas such as the Caribbean. C&W still has a significant amount of cash on its balance sheet. Because Texas would take on its loss-making side,it would probably receive the lion's share of the cash. At its last set of results, C&W's cash reserves stood at £3.8bn. But the company has since announced proposed restructuring costs of £800m, and £1.5bn has been controversially ring-fenced to cover a possible future tax liability associated with the sale of One2One to Deutsche Telekom in 1999.

No final decision has been made on what will happen to C&W's UK operation. But a well-placed source said it could be sold to Energis, chaired by the Conservative MP Archie Norman.

Mr Li is not, however, prepared to launch a hostile bid for C&W. This would prevent Mr Li from gaining access to C&W's confidential and detailed financial data. Many analysts are nervous about further liabilities lurking in C&W's books after the earlier £1.5bn liability disclosure.

Investec Securities believes that on a sum-of-the-parts basis, C&W is worth between 51p and 114p-a-share.