MARKET COMMENT
C&W Is Still Too Inefficient

By David Kuo (TMFDragon)
November 14, 2001

Carburton Street, London -- Cable & Wireless (LSE: CW.) has finally succumbed to the wishes of its more vociferous shareholders and will return some of its £4.7b cash pile. It will pay a special dividend of 11.5p per share and will also orchestrate a buyback programme to acquire up to 15% of its outstanding shares. The special dividend will be in addition to the final dividend, which will provide shareholders with a total dividend similar to last year.

The announcement was made as the company unveiled its half time financial picture. In the six months to September, the telecom services firm posted a fall in revenue to £3.5b from £4.6b and a post-tax loss of £567m compared with a profit of £4.1b last time. At the operating level, earnings before interest, tax, depreciation, amortisation and exceptionals were cut in half to £508m from £1.1b last time. Although the main bulk of the fall was due to the disposal of discontinued operations, the decline in profitability at its C&W Global operation gives cause for worry. C&W is aware of the problem and has identified staff costs at this business unit as its largest operating expense, representing 18% of revenue. The company has addressed the problem and has reduced headcount and expects the benefits to feed through in the second half of the year.

Cable & Wireless is right to return some of its surplus cash to shareholders. It has more cash than it knows what to do with. The sale of its stakes in Hong Kong Telecom and Optus to Pacific Century Cyber Works and Singtel respectively swelled its coffers to £4.7b. And with the reduction in capital expenditure that was announced today, Cable & Wireless needs less cash to finance the rollout of its infrastructure network.

The issue at C&W is not what it can acquire to become a bigger player, but how it can enhance what it has got already. C&W is still in transition, albeit late stage, from telecom operator to telecom services based on Internet Protocol. The company needs to address, and quickly, efficiency improvements in reaction to the rapid competition that has built up as a result of overcapacity within the industry. Pricing pressures within the industry are unlikely to go away and C&W must make sure that it is lean enough to compete.

More over at the C&W discussion board.