Fool's Eye View

[ November 15, 2000 ]

Cash & No Wireless

By Christopher Spink (TMFEagle)

Great Titchfield Street, London -- Cable & Wireless (LSE: CW.) now seems most inappropriately named. As the headline states, the group has nearly £5b cash on its balance sheet as at the end of September. The company, which released interim results today, has also divested itself of most of its wireless activities as well, selling Hong Kong Telecom to Pacific Century Cyberworks and One2One to Deutsche Telekom.

Instead the 130-year-old group, under chief executive Graham Wallace, has now chosen to focus on the business market, providing integrated voice and data telecommunication services to this expanding client base. The company still has cable interests but apart from that C&W is unrecognisable from the confusing conglomerate Wallace inherited in February 1999.

Interim results

These recent changes mean today's interim results remain pretty confusing, though. Total revenue fell 2% to £4.425b. However, this was mainly because of the disposal of the Hong Kong Telecom and Cable & Wireless Communications consumer businesses. Both were competitive consumer operations, affected by declining margins.

The remaining corporate operations should prove more profitable. Indeed underlying profit, before tax, exceptional items and goodwill amortisation, came in at £537m, at the high end of expectations. This cannot be compared with last year's profit figure. Wallace has elucidated his plans going forward to develop this business, using the £5b cash pile now accrued on C&W's balance sheet.

Revenue from continuing operations rose by 15%. Turnover increased 60% at the Internet Protocol operations of Cable & Wireless Global, the most interesting arm of C&W's continuing business. Wallace envisages annual revenue for the whole company growing at the rate of 15% to 20% annually for the next few years.

Future growth

Wallace has managed to turn C&W from a large sprawling indebted group to a leaner, cash-rich beast focused on high growth and profitable areas of the telecoms spectrum. He now has to fulfil this promise. He intends to do this by creating a global modern telecom IP infrastructure, so that large clients only have to choose one telecom company to provide all their worldwide needs.

Partnerships have been signed with Compaq (NYSE: CPQ), Microsoft (Nasdaq: MSFT), Nokia (NYSE: NOK), Nortel (NYSE: NT) and Baltimore (LSE: BLM) to help this move. The theory is that a customer only need contact C&W to set up a whole combined series of communications options. C&W's intention then is to become one of the world's leading application services providers.

The shares currently stand at 875p, 44% below this year's high. Considering the transformations recently wrought, that seems unfair. The group has none of the debt problems associated with either mobile companies such as Vodafone (LSE: VOD) or cable competitors like Telewest (LSE: TWT). Neither is C&W afflicted by the problems BT (LSE: BT.A), as a fixed line former monopoly, has to cope with.

Admittedly there is still room for further restructuring. The group could sell off its old-style telecom Caribbean and Australian Optus consumer fixed line and mobile businesses, as well as its remaining stake in Hong Kong Telecom, via the 15% of shares it holds in Pacific Century Cyberworks. However, the focus that C&W has lacked for so long, now definitely seems there with high margin global IP solutions providing future revenue growth.

Where Next?

• Cable & Wireless interim results
• Cable & Wireless discussion board
• Foolish comment on Vodafone's interims yesterday