Can Wallace hold on as City turns against C&W? NEWS ANALYSIS: Telecoms group has lost a third of its value in 48 hours after a botched profits warning infuriated investors
The Independent - United Kingdom; Mar 15, 2001
BY MICHAEL HARRISON AND LIZ VAUGHAN-ADAMS
UP UNTIL this week, the chief executive of Cable & Wireless, Graham Wallace, was regarded, if not as the golden boy of the telecoms industry, then certainly a safe pair of hands in a sector where turmoil has become the watchword. Today that reputation lies in tatters after a botched profits warning that has wiped a third from the company's value in the space of 48 hours.
The calamitous share price fall has left City analysts speculating openly as to whether the architect of the modern-day C&W can survive and where his strategy went so badly wrong.
It all looked so different when Mr Wallace took over the reins in C&W's Theobalds Road head offices, in London, two years ago. Mr Wallace quickly set about completing the transformation of C&W that had begun under his predecessor Dick Brown. The last vestiges of the old federated structure that characterised C&W in the days of Lord Young were swept away. More importantly, Mr Wallace accelerated the process of turning C&W into a telecoms business focussed on business customers, data communication and internet protocol. Thus, the mobile operator One2One, Cable & Wireless Communications, the group's residential cable division, and finally C&W's controlling stake in Hongkong Telecom were sold off in short order and the proceeds ploughed into a big expansion in data services.
Tuesday's shock profits warning, and the maladroit way in which it was handled, has left many in the City sceptical of how well Mr Wallace handled that transition at C&W. Moreover, it has let rip the pent-up resentment felt in some quarters at the destruction of shareholder value that the Hongkong Telecom deal has led to. When Mr Wallace sold C&W's 54 per cent stake to Richard Li's Pacific Century CyberWorks in August last year he accepted 4.5 billion PCCW shares in part-exchange. At the time, those shares were worth pounds 6.3bn. Today they are valued at pounds 1.5bn. The mistake was not so much selling to Mr Li - who was probably the only buyer in town acceptable to the Chinese - but in Mr Wallace's failure to insist on a "collar" arrangement which would have limited C&W's exposure to the precipitous fall in the price of PCCW shares.
In an environment where sentiment is everything, this week's profit warning has to be viewed against that backdrop. The company blamed the warning on difficulties in the US, where it has been hit by a sharp drop in the price for carrying internet, and in Japan, where the price of international voice calls has fallen. Margins, it said, would fall while earnings per share for the year were now expected to be in a range of 14-16p compared with initial estimates of 17-18p. The company is taking a number of cost- cutting measures including axing 4,000 staff.
Analysts and shareholders alike were particularly angered by the announcement since they felt they had been guided to believe there was not any bad news in the offing. Indeed, only two hours before the profit warning was issued on Tuesday, a C&W spokesman was busily assuring the wire services that there was no news.
"This is probably the worst downgrade issued by any telco since the bear market started a year ago and it has to put the Cable & Wireless Global strategy in serious doubt," said Chris Godsmark, an analyst at Investec Henderson Crosthwaite.
The city had been updated by the company earlier this year and had been led to believe the strategy was still on track. "Either they were completely misleading people and they actually did know or they are not aware of what's going on in the market. But either way, it is worrying," said one angry analyst. Analysts at Dresdner Kleinwort Wasserstein said they were "surprised" that C&W was not forecasting the falls in the price of internet traffic. "This indicates that volume growth could be the real reason for US problems and could indicate that C&W has had difficulties in adding and retaining customers," they said.
The strategy pursued by Mr Wallace since he became chief executive in February, has been built around the creation of something called Cable & Wireless Gobal. Set up in April, 1999, the business joined the company's operations in the US, UK, Europe and Japan with the aim of being a leading global provider of internet protocol and data services to business customers.
Analysts now question how much progress has been made. "The core business still remains, very much, a voice-based business ... trying to make the transition to data and that's proving difficult. The big risk in the strategy is: Can the management execute it effectively."
Another said: "The big question here is: Are they pouring too much expenditure into areas of the market like Japan and the US where they're exposed to the stiffest price competition. Moreover, did they sell off the right businesses? There are serious questions over whether they've done the right thing. They're blaming this on the market and that's rubbish. It's straight forward management failure," he said, adding: "They're buying businesses in the wrong areas, they're exposed to price competition, they've invested too much money in markets they don't understand, they've neglected the UK business. They're destroying value rather than creating it."
Others believed C&W was more a victim of economic conditions rather than its own shortcomings. Kevin Fogarty, a telecoms analyst at Teather & Greenwood, said: "I think it [the warning] can largely be put down to changing market conditions" adding he would be "very surprised" if it led to Mr Wallace's departure. While analysts were divided on whether heads would roll as a result of the warning, they were united in their view that C&W would come under increasing pressure to return some of the cash it has accumulated through disposals to shareholders. Indeed C&W is on the verge of disposing of its majority stake in C&W Optus, which is expected to double its cash pile to around pounds 6bn.
C&W was expected to spend much of its cash on acquisitions, adding to the billions Mr Wallace has already invested to build up IP and fibre optic networks and forge joint ventures with the likes of Microsoft, Compaq, Nokia, Nortel and Baltimore. As one analyst said: "Major institutions are now saying they want the cash back. They want a share buy back or a special dividend."
Mr Wallace will have the opportunity to explain how he intends to restore investor confidence when C&W delivers its full-year results - still two months away. First, he has to survive that long, which may not be quite so easy given the depth of resentment against him.
globalarchive.ft.com |
