The Anglo File: Cable, Wireless or Neither?

For investors in this British telecom company, any news of a shift in its business plan is good news.
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Cable & Wireless

(CWP)

confirmed Tuesday that it is in preliminary talks with several parties, including

Telewest Communications

(TWSTY)

, over transferring certain parts of its business. This overdue announcement may provide some comfort to C&W's long-suffering shareholders, but it's just the beginning of what will likely be a long, hard road.

C&W is a veritable hodgepodge of holdings, some majority and some minority, in telecom and cable firms around the world.

To say investors are currently lukewarm on C&W would be an understatement. German conglomerate

Veba

(VEB)

sold its 10% stake at a 12% discount to the market on March 16 as part of a divestment of noncore holdings.

The company's malaise has weighed on its share price. This year, C&W has trailed not only its highflying peers, but also the market as a whole. Through April 5, C&W's share price was up 1.8%, compared with 17.1% for

Datastream's

telecom index and 7.6% for the

FTSE

.

U.K. telecoms have been particularly buoyant. Over the same period,

Vodafone's

(VOD) - Get Report

stock has risen 21% and

British Telecom

(BTY)

is up 14%.

Much of the problem can be attributed to the performance of

Hong Kong Telecom

(HKT)

, in which C&W holds a 54% stake. Half-year results for Hong Kong Telecom showed all its businesses -- international, local and mobile -- were under increasing competitive pressure from newcomers to the market. Not good news for C&W, considering the subsidiary accounted for 73% of C&W's operating profits in the fiscal year to March 31, 1998.

Taking the Wireless Out of Cable & Wireless

In March, C&W said it might sell its 50% stake in mobile telephone group

One2One

. This would be tempting to the company's new CEO, Graham Wallace. There appears to be no end in sight to the U.K.'s cellular boom, and C&W's stake could be worth as much as $3.7 billion, according to Chris Godsmark of the institutional brokerage

Henderson Crosthwaite

. Godsmark has a hold rating on C&W, and Henderson has no investment banking relationship with the company.

Philip Dumas, an institutional broker at

Durlacher

in London, says he believes C&W would be wise to "take the money and run." Yet some shareholders, such as Amit Kandawala of

Wrights Investors' Services

, question the wisdom of getting out of a high-margin business like mobile telephony only to rely on the fixed-line businesses, which are less profitable.

Taking the Cable Out of Cable & Wireless

Confirmation that U.K. cable operator Telewest is one of the parties with which C&W is in talks would imply C&W is considering merging the cable assets of its

Cable & Wireless Communications

subsidiary (it holds a 53% stake) with Telewest and absorbing the business telephone operations into itself.

This would mean that C&W is leaning toward divesting itself of noncore assets and focusing on becoming a global telecommunications company centering on the lucrative corporate-client market, a strategy similar to what BT and

AT&T

(T) - Get Report

are pursuing.

Melding the disparate entities that make up the C&W group would allow the company to take advantage of the natural synergies associated with a global network where the telco owns most of the pipes that carry data and voice.

While this move would certainly bring a level of focus currently lacking in the company's outlook, it would, according to Philip Carse of

Commerzbank

, "be a complete reversal of the company's strategy."

Such a U-turn might be a bit jarring to investors. The merger of the three cable companies and C&W's Mercury telephone network to form CWC was an extremely complex and time-consuming affair, and this would effectively unravel all of that work. Incidentally, Wallace's previous position was head of CWC.

Commerzbank's Carse also worries about rushing headlong into the corporate market, which is considered the most competitive part of telecommunications in the U.K. C&W currently has the second-largest number of corporate clients on its books after BT. But other players in the market include the super-aggressive

Colt

(COLTY)

and

Energis

(ENGSY)

.

Neither Cable Nor Wireless

C&W's name has been in the headlines since the beginning of the year. In January, speculation swirled in the market that the company was on the auction block. Potential suitors included

Deutsche Telekom

(DT) - Get Report

.

However, Veba's wholesale and bargain-price block sale of shares last month proved not only that the German company wasn't interested in buying C&W, but that nobody else is, either.

Although the company stressed in the statement Tuesday that there is no guarantee that any of the current discussions would bear fruit, it has become increasing clear that C&W needs to do something.

And even if C&W does finalize a plan, whether it will work is another matter entirely. As Durlacher's Dumas put it: "The proof of the pudding is in the eating." And just what will it taste like?