View From City Road: Confusion over C&W strategy

Unless the stock market has its wires seriously crossed, something is afoot at Cable & Wireless. Up another 20p to 415p yesterday, the shares are anticipating something rather more spicy than the sparkling set of interims the company is due to announce next month.

The buzz is that the group might be tempted into a full-scale demerger of its 57.5 per cent-owned subsidiary, Hongkong Telecom. An equally mouth-watering possibility is equity participation for Hongkong Telecom in one of China's telecom ventures.

Demerger would certainly make sense from a shareholder-value point of view. C&W's stake in Hongkong Telecom is worth almost as much as C&W itself. In other words, the stock market puts only a marginal value on the rest - Mercury, One-2-One, its interests in the Caribbean, Japan, Australia and its international superhighway. This, as Lord Young, C&W's chairman, is only too aware, is not a flattering position to be in.

Provided C&W can retain close ties with Hongkong Telecom, it might also make good commercial sense. For the latter it could prove a positive disadvantage to have a British parent after the handover in 1997. All these things make a powerful case for demerger.

None the less, it takes a particular type of self-sacrificing management to dismantle an empire, even if a good case can be made for doing so. Lord Young has no doubt thought long and hard on it all, but he does not seem like the man to do it.

What is certain is that he needs to do something. In the past six months the company's market value has fallen from around pounds 12bn to pounds 8.5bn. Confusion reigns over its strategy. It is too small to sit at high table with the big telecom players but its niche market approach may also be flawed.

There is also growing concern over the outlook for Mercury and One-2- One. Whatever is afoot in Hong Kong, C&W is in need of new initiatives. Demerger is not the only way of realising shareholder value. A reverse takeover by Hongkong Telecom would achieve the same thing.