Inflated aims but no direction: C&W's grand plan is pricked

Investors are losing faith as the telecoms giant pumps more cash into a loss-maker. Clayton Hirst reports

Clueless & Witless is how some shareholders refer to Cable & Wireless, the telecoms operator. "Clueless, because it is spending vast amounts of money on loss-making ventures, and witless, because it doesn't seem to have any other ideas," grumbles one investor.

Graham Wallace, the company's chief executive, will do nothing to change that nickname this week when he issues the latest statement on trading. Coming after three successive profits warnings, it will show that C&W's international internet-based division, which accounts for more than 70 per cent of the company's revenues, is going backwards.

C&W has pumped more than £3bn into the division, named Global, which is expected to show a 7-8 per cent drop in revenues. While it won't be classed as a profits warning, the announ- cement could make C&W's shares tumble even faster.

Today, a share in the company is worth just 145.75p, a far cry from when the C&W balloon was flying high and peaked at £15 in 2000. It will do even less for the credibility of Mr Wallace, who has fallen from City hero to zero in just over a year.

But what's so bad about C&W? Isn't it just another victim of the sudden downturn in the telecoms sector? Well, maybe not.

The company, which today is worth £3.5bn, has a split personality. Its Global business loses money hand over fist and is not expected to break even for at least three years. Nevertheless, Mr Wallace believes that one day it will generate a lot of cash, and is continuing to pump in money to grow it. Much of that is coming from C&W's Regional arm, which operates telecoms services in countries such as Jamaica, Panama and Macau. Because Mr Wallace is siphoning off so much money from Regional into Global, investors are getting twitchy.

What's more, C&W's once-giant £4.7bn cash mountain is now more of a £2.6bn hillock, after its recent shopping spree to acquire a number of largely unprofitable businesses to bolt on to Global.

And now that the new finance director, David Prince, has made it clear that shareholders won't see the colour of C&W's money through special dividends or share buybacks, the share price has collapsed. C&W is at a level where some believe its parts are worth more than the sum of the whole.

"Breaking up the business is definitely an option. It is one of the things the management should consider if they can't make the cost base work," says Sean Johnstone, telecoms analyst at SG Securities. Unfortunately, while there would be plenty of buyers for Regional, there would be few interested in Global.

Perhaps the City would be a little more tolerant of C&W if it were run differently. Earlier this summer Mr Wallace and his fellow board members were booed at the company's annual meeting. Shareholders were up in arms about a £2.1m payoff given to two departing directors. Mr Wallace also came in for strong criticism over his insistence on having a new two-year contract of employment, going against corporate governance guidance. If Mr Wallace lost his job then he would receive a minimum £1.55m pay off.

The retirement of the 70-year-old Rolls-Royce veteran Sir Ralph Robins as C&W chairman could have provided the opportunity to placate some disgruntled shareholders, who wanted an independent outsider brought in to monitor Mr Wallace's plans. But David Nash, the deputy chairman of C&W, will replace Sir Ralph at the end of the year and is unlikely to be a stern critic.

The jury is still out on Mr Prince, who joined from Hong Kong internet company PacificCenturyCyberworks earlier this year. In July he held an inaugural lunch for nearly 30 telecoms analysts. Many City scribblers came away impressed with the finance director, believing he would lessen the business's appetite for cash, but he has yet to act.

"The cost base of the Global division has to decline faster than its revenue base. That's the bottom line," says SG's Mr Johnstone. "It's not a question of can they reduce the cost, more a question of how."

Global has a £650m capital budget and many analysts believe Mr Prince must reduce this by at least £100m for C&W to meet its break-even targets. The upshot could be 1,000 redundancies.

By aggressively building Global, Mr Wallace is competing head to head for corporate customers with the likes of BT, Equant, Colt and Deutsche Telekom. But because much of the operation has been created by buying companies – such as Exodus and Digital Island – and bolting them together, C&W can seem like a hotchpotch of businesses and brands.

"One area C&W really needs to concentrate on is its branding," says Eric Paulak, a director at technology research group Gartner. "Good Lord, it simply has too many names. At best, this is sloppy practice." The company, for example, still uses the Exodus brand name followed by the tag "a Cable & Wireless service" – even though when C&W bought the US internet company, its reputation was tarnished due to having filed for Chapter 11 bankruptcy protection.

Mr Paulak says C&W should take a leaf out of Vodafone's book. The mobile operator, like C&W, has grown by acquisition, but is now rebranding most of its businesses under the Vodafone name.

Things aren't much better in the UK, where C&W seems to be on an anti-BT crusade, taking every chance to knock its more powerful rival. However, Mr Paulak says that in reality C&W is a "poorer, smaller version of BT with a client base made up of second-tier customers".

With a glut of telecoms suppliers and dwindling demand still bedevilling the sector, some believe C&W should merge its UK operation with a rival company.

It is understood the company cast its eye over Global Crossing's UK network before it was snapped up by Hutchison Whampoa and Singapore Technologies.

It is also understood that C&W, like BT, has mulled a bid for Colt.

But unless Mr Wallace manages to restore City confidence in his own business, he could find C&W receives a take- over bid of its own.