C&W's Cash Position Could Make Firm Vulnerable to Rivals, Investors Worry
By ALMAR LATOUR
Staff Reporter of THE WALL STREET JOURNAL
LONDON -- Most telecom companies are struggling to pay off monstrous debts, but Cable & Wireless PLC's pockets are bulging with cash.
The U.K.-based telecommunications operator, which Wednesday reported annual results that were in line with a March profit warning, has undergone a massive restructuring in the past two years, selling unit after unit and accumulating net cash and marketable securities of around 7.5 billion pounds (12.16 billion euros or $10.68 billion) in the process. Once a kaleidoscopic collection of telecom companies around the world, C&W now is a tightly focused data- and voice-network operator and runs the world's third-largest global data network.
But not everyone is happy with C&W's overstuffed coffers or its recent performance. The cash pile makes the company not just a predator in the tumultuous telecom arena, some investors argue, but also possible prey for bigger rivals in search of attractively priced data-network operations. C&W should spend its cash on acquisitions or give it all back to shareholders, some investors suggest.
Meanwhile, sagging prices for telecom traffic in the U.S. and Japan have put a dent in C&W's global revenue in the past six months, forcing the company to accelerate its already-drastic restructuring measures. And the outlook for the next six months is grim.
"C&W has to demonstrate that it's on top of its business," says telecom consultant Stewart McIntosh of Adventis in London. "If the company's performance is in doubt, it doesn't make sense to keep all that cash around for acquisitions."
Still, Graham Wallace, the company's chief executive officer and the architect of C&W's recent metamorphosis, doesn't feel any pressure to empty his company's wallet in a hurry.
"The money is not burning a hole in our pocket," he says. "Most telecom companies spend all of their money and then try to raise cash afterward. We'd be crazy to give up the flexibility that our net cash situation provides."
The outspoken Mr. Wallace says the telecom industry is entering a period of unprecedented turbulence in which C&W has its strong financial position as a trump card. As financial markets have contracted, major telecom operators and start-ups alike are finding themselves strapped for cash, unable to execute optimistic business plans. The result: Many companies in the sector face the grim choice of going bust or being acquired.
"The whole industry is nightmarishly stressed," Mr. Wallace says. "There are now more managers that see the value in being part of a larger company. There are great opportunities for us out there."
When those much-discussed opportunities will become actual deals for C&W remains a question, further adding to the angst of investors who are worried about C&W's cash pile. Even when pressed, Mr. Wallace refuses to set deadlines for acquisitions, hinting that deals could come about in "one, six or 12 months." He argues that C&W isn't obsessed by whether company valuations in the sector have reached a bottom. "Changes in relative valuation don't change my view on acquisitions," he says. "Economics do."
It's not all talk. On Monday, C&W announced it would acquire Digital Island, a small Web hosting and content-distribution company, via a $300 million (341.6 million euros) tender offer, and make a $1 billion funding commitment. Just a year ago, that company's market capitalization was $10 billion. "We only will do acquisitions when the company's valuation falls well below what we think the company is worth to us in the future," Mr. Wallace says.
To ease investor worries, C&W said Wednesday it will seek approval from shareholders to buy back up to 15% of its shares. The plan merely expands the company's right -- unexercised so far -- to buy back up to 8.7% of its shares. The new proposal, if voted through by shareholders on July 20, will allow C&W to buy back stock valued at almost 2 billion pounds.
Talk of share buybacks couldn't hide C&W's global group's poor performance, though. The group, which offers voice and data services to businesses world-wide, posted an operating loss of 222 million pounds for the year ended March 31, compared with a profit of 43 million pounds a year earlier.
Meanwhile, Mr. Wallace, the CEO, has stepped up restructuring measures and aims to slash costs by eliminating 4,000 jobs and closing some sales offices. "We are looking to get a conservative and efficient balance sheet," he says.
Write to Almar Latour at almar.latour@wsj.com5
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