DJ Cable & Wireless Strategy Still In Focus Despite US Buy
14 May 08:56
By Richard Inder
Of DOW JONES NEWSWIRES
LONDON (Dow Jones)--Cable & Wireless PLC's (CWP) $340 million acquisition
Monday of U.S. Internet company Digital Island Inc. (ISLD) will do little to
deflect questions over its long-term strategy when it posts full-year results
Wednesday.
Observers say the buy only marginally addresses concerns about the group's
reliance on the intensely competitive long-distance voice and data transmission
market and there are doubts that C&W can profitably put its near GBP7 billion
war chest of cash and marketable securities to work.
"Digital Island does not answer the debate over the cash pile one way or
another," said one analyst, who added the company will need to articulate a
clear strategy to defend its position of not returning a large portion of cash
to shareholders. "They are not ready to throw in the towel yet, but if there is
no change in the next six to twelve months the clamor for either a share
buyback or a special dividend will be too loud to ignore."
Still, this analyst and others believe the company may make a small
concession to shareholders' concerns by announcing a slightly larger dividend
than expectations. They expect a full year dividend of around 16.15 pence, up
from last year's 15 pence.
At 1242 GMT the stock was up 1.13%, or 5 pence, at 448.5 pence, while the DJ
Stoxx Telecommunications index was down 1.6%, or 6.82 points at 423.68 points.
Over the last two years C&W, the U.K.'s third-largest telecommunications
company, has been paring down its collection of regional telephone monopolies
in former British colonies to remake itself into an integrated global
organization providing data and Internet services to the world's largest
companies - a process that's left the group with its huge cash pile.
But a warning March that full-year earnings before interest, tax,
depreciation, and amortization (EBITDA) for the group's Cable & Wireless Global
unit would be around 8% of sales, against analysts' expectations of around 12%
to 13% indicated that the transformation is taking much longer and proving more
costly than expected. It also added to fears about the company's ability to
deliver.
The Global unit is the vehicle formed to implement the group's new strategy.
The warning, largely due to unanticipated competition in the long-distance
voice and data transmission market, led to louder calls for the company to come
up with a deal that would reduce its reliance on this highly competitive
business.
The acquisition of Digital Island, which provides Internet services for
business customers such as Web site hosting, content delivery and intelligent
network services, is in line with the group's new strategy and marginally
reduces its reliance on sales of these services, but not by much.
"Digital Island's sales of $140 million to $145 million (in the year to Sept.
30, 2001) is small in comparison to C&W global sales of GBP3.8 billion," said
another analyst.
C&W's $3.40 a share cash offer for Digital Island represents a 9% premium to
Friday's $3.12 closing price.
The buy is expected to be earnings-dilutive initially and become
earnings-accretive by the end of the third year after the buy. Over the longer
term C&W says the buy will create "significant value".
Observers Sympathetic To Plight
Analysts are sympathetic to the group's plight. They say there is no one big
acquisition that addresses the group's weaknesses, while the majority of the
group's targets are some way away from being profitable. As a result, should
C&W move on these companies it needs to retain a strong balance sheet to fund
ongoing losses.
"There is no one big multi-billion acquisition that is a strategic fit," said
Nomura analyst Paul Mount, who added that C&W had secured Digital Island for a
good price. "They are much more likely to make a series of smaller acquisitions
like (Digital Island)."
Possible targets include C&W's U.K.'s competitors Colt Telecom Group PLC
(COLT), Energis PLC (ENGSY), or any one of the struggling European alternative
network operators like Global Telesystems Inc. (GTS), or Viatel Inc. (VYTLQ).
In the U.S. possible targets include XO Communications Inc. (XOXO); Metromedia
Fiber Network Inc. (MFNX); Level 3 Communications Inc. (LVLT); or application
service providers, ASPs, such as FutureLink Systems (V.FLS).
ASPs lease computer applications across the Internet that would otherwise be
located on clients' computers.
"There will be more acquisitions to come," said another observer.
Observers expect the company to report sales between GBP7 billion and GBP8
billion against last year's GBP9.2 billion sales.
They expect EBITDA to be between GBP1.4 billion and GBP1.8 billion down from
last year's GBP2.4 billion, while before items pretax profit is expected to be
between GBP590 million and GBP800 million against last year's GBP1.122 billion.
The dramatic fall in sales and EBITDA reflects the group's transformation
over the last year.
Exceptional items including the costs of updating the group's technology and
profits from the sale of businesses in Hong Kong and the U.K. should amount to
an exceptional gain of GBP3 billion.
Company Web site: cw.com
-By Richard Inder, Dow Jones Newswires; 44 207 842 9279;
richard.inder@dowjones.com.
(END) DOW JONES NEWS 05-14-01
08:56 AM |
