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MARKET COMMENT
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It never rains but it pours. Cable & Wireless (LSE: CW.)(NYSE: CWP) delivered a hammer blow to its shareholders after the market closed on Friday night. Its famous cash pile, for long the envy of every other telecom company, may finally be whittled away entirely. Just four weeks ago the company revealed that its remaining cash resources of £2.2b would be decreased by £800m due to the cost of restructuring its Global division. However, following Friday's downgrade in the company's credit rating by Moody's, a special clause in the sale agreement of One2One has been triggered. Cable & Wireless sold its 50% interest in One2One to Deutsche Telekom for £3.5b in 1999. As is usual practice, a number of conditions were outlined in the sale agreement. One of the most common is for the seller to indemnify the purchaser so that if any additional tax liabilities relating to the seller's period of ownership are discovered then some form of compensation is paid. In this case there was an additional clause, triggered on Friday, specifying that if Cable & Wireless's credit rating fell below a certain level, then it would have to get a bank to underwrite the potential liabilities or, failing that, put £1.5b into a ring-fenced bank account to cover them. Apparently no bank has been willing to provide a guarantee meaning that, unless Cable & Wireless can get Deutsche Telekom to waive this part of the agreement, it will have to put most of its remaining cash pile to one side. Shares in Cable & Wireless crashed when they resumed trading this morning. At one point they fell by as much as 55% to 37p. Although they have recovered slightly, at the time of writing they were still down by more than a third at 52.5p. At this level the company is valued at just £1.25b, meaning that it may even be in danger of losing its spot in the FTSE 100 when the latest reshuffle is announced later this week. Cable & Wireless has claimed that the likelihood of any tax being due is remote and therefore that its auditors did not consider it was necessary to make a disclosure of this matter. The reaction of the market this morning shows how incredibly naïve this was. In truth it may reflect more of a lack of confidence in the company's management rather than a belief that any tax liability will become due. The shares are best left well alone even if on a sum of the parts valuation they may look cheap. More: Cable & Wireless : Unable & Hopeless | C&W discussion board