Thus profits warning sparks fears for UK telecoms sector

Fears of a profit warning from Cable & Wireless (C&W) intensified yesterday after Thus, its smaller UK rival, blamed "predatory pricing" in the marketplace for a fall in its first-half profits.

Fears of a profit warning from Cable & Wireless (C&W) intensified yesterday after Thus, its smaller UK rival, blamed "predatory pricing" in the marketplace for a fall in its first-half profits.

Shares in Thus collapsed 23.5 per cent to 13p, while C&W shares fell 2 per cent. The warning from Thus was its second in three months, following on from a statement at its annual meeting in July.

Analysts said there had been evidence of "irrational" pricing by C&W in the past six weeks, adding that the outlook for its UK operations were getting worse.

A number of brokers have recently cut their recommendations on C&W over fears for its UK trading, but a spokesman for the company yesterday reiterated C&W's determination to attack competitors, such as Thus, head-on. "It is nonsense for Thus to talk about predatory pricing. It is a competitive market. It has always been," he said. He refused to comment on the likelihood of a profit warning accompanying C&W's November interim results.

Francesco Caio, C&W's chief executive, has made improving the group's UK business a priority but has long held the belief that the domestic market cannot support so many competing network operators alongside BT Group.

Matthew Pearson, an analyst at Investec Securities, said: "We have seen irrational pricing recently. What we saw at the beginning of the year was the re-emergence of MCI, Global Crossing and C&W. We've seen an acceleration of that aggression in the marketplace and C&W is definitely one of those."

Reports surfaced yesterday of C&W salesmen offering existing corporate clients rebates to renew telecoms contracts with the new, lower prices backdated for six months.

"There is no policy of doing that," the C&W spokesman said. "Are there instances where salesmen come up with something special? I'm sure there are, but there is no policy on that."

Bill Allan, the chief executive of Thus, issued a pre-close trading statement yesterday before the company's half-yearly results due on 15 November. It said revenue growth in the six months to 30 September had been strong with expected year-on-year headline growth of 12 per cent. Core business services of data, telecoms and internet are expected to increase by 18 per cent.

The statement said: "Notwithstanding the above, the company has experienced tougher trading conditions, with margins being impacted by increased price competition in the current quarter, including predatory pricing for corporate accounts, switched voice and leased line services."

Part of Thus's problems have been caused by the quicker-than-expected switch by customers from dial-up internet connections to broadband connections, where Thus earns lower profit margins. "As a result, first-half earnings before interest, tax, depreciation and amortisation (ebitda) will now be less than that recorded for the equivalent period last year," it said.

However, in trying to strike a more upbeat note, the company also said that for the full year to 31 March 2005 it would deliver sales of not less than £360m with continued positive free cash flow and ebitda of not less than £39m.

Dan Gardiner, a telecoms analyst at Seymour Pierce, said: "Ebitda guidance for 2005 has now decreased 30 per cent from £56m in July to £39m."

As the company admits, its problems are unlikely to go away soon. Competition in the market for commodity products (corporate voice connections and leased lines) has lowered the renewal prices for new contracts. Thus cites "unsustainable pricing" by competitors (suspects include C&W, Energis and MCI) seeking to retain market share in these products as the cause of this renewed competition.