The telecoms group Cable & Wireless Worldwide (CWW) shocked the market yesterday as it warned that the coalition Government's spending cuts would hit its profits.
The news emerged as the company prepared for clashes over its executive pay packages with shareholders attending its annual meeting today.
In an unscheduled update, CWW said it had become the first blue-chip victim of the austerity Budget unveiled by the Chancellor last month, which outlined an initial £6bn of state spending cuts to help tackle the deficit.
"Following the new Government's emergency Budget in late June, non-contracted spending in the UK public sector has slowed very significantly. Given the nature of our public-sector business, this reduction will adversely impact trading in the current year," CWW said. Jim Marsh, the chief executive of CWW, added: "What has surprised us is the speed with which this was put into action."
Government deals account for about 12 per cent of CWW's revenues. Following yesterday's warning, its shares closed 17 per cent lower at 69p. Morten Singleton, an analyst at Collins Stewart, predicted a string of downgrades to recommendations and forecasts, saying he thought the shares would fall further because the short term "harbours unquantified pain".
The reduction in government spending means CWW is now forecasting earnings before interest, taxation, depreciation and amortisation at the lower end of a range set between £452m and £484m.
The setback has forced CWW to step up its cost-cutting plans, and it is slashing its total operating expenditure for the year, although it insists it will not be cutting jobs.
Yesterday's announcement could not have come at a worse time for the company. Today it will attempt to gain investors' support for its remuneration packages for senior managers.
The Communications Workers Union (CWU) said yesterday it was concerned by CWW's profits warning, and called on the company to slash bonus payouts to executives.
This week, the shareholder groups Pirc and the Association of British Insurers both expressed concern over the size of the remuneration packages at Cable & Wireless Worldwide and Cable & Wireless Communications. The company had faced shareholder unrest over pay before Cable & Wireless split earlier this year to create CWW and CWC. The two companies started trading separately at the end of March.
Andy Kerr, the deputy general secretary of the CWU, said: "Cable & Wireless has persisted with a controversial business plan driven by obscene bonuses for senior executives. Any news of cutting jobs before cutting the millions of pounds paid to a handful of executives in bonuses would be fat-cat economics in the extreme."
Jonathan Jackson, the head of equities at Killik & Co, said the fall in the share price yesterday was "a reflection of the market's disappointment that the company has warned so soon after the demerger".
Yet despite the effects of the Budget, CWW said in a statement it supported the Government's overall approach and saw "significant opportunity in this area over the medium term" for its products and services.
Mr Singleton, of Collins Stewart, said the coalition's policies could bring some "long-term gain" because CWW believed the Government was keen to reduce its dependence on its rival BT. "CWW should be a net beneficiary of such a move," he added.Reuse content