New View of the Map at Cable and Wireless
By SIMON ROMERO
When Kenny Anthony was re-elected prime minister of St. Lucia this month, one of the first faxed congratulations he received was from a high-ranking executive at Britain's Cable and Wireless.
It came from the chief executive of the telephone company's regional operations, which include more than a dozen Caribbean countries and far-flung locales like Diego Garcia, the Falkland Islands and Macao. Rarely had a powerful Cable and Wireless executive been so swift and cordial in his congratulations.
"Cable and Wireless has learned that they have to play marbles with us," said Earl Bousquet, Mr. Anthony's spokesman. "They are recognizing the need for a relationship free of colonial baggage."
Some of the fawning is a response to St. Lucia's decision in April to end Cable and Wireless's century-old monopoly, permitting competition in its telephone market. St. Lucia, the most populous of the island countries that make up the Organization of Eastern Caribbean States, followed the example of neighbors like Jamaica that have sought to weaken Cable and Wireless's grip on their markets.
The opening of the telecommunications markets where Cable and Wireless operates is just one of the challenges facing the 129-year-old company, which long provided telegraph and telephone service in the colonies of the British Empire.
The company's strategy of cobbling together a money-losing World Wide Web host empire while defending its profitable colonial legacies from competition is coming under fire. Its foray into the United States with a proposed $850 million acquisition of the assets of Exodus Communications (news/quote), an Internet-services company based in Santa Clara, Calif., that is under bankruptcy protection, is facing skepticism. If the deal is completed next month, the company would become the world's largest Web-host business.
"I'm convinced we need to reinvent ourselves in order to focus on an internationalized Internet-based strategy," Graham Wallace, chief executive of Cable and Wireless, said in an interview.
Investors are not so sanguine about Mr. Wallace's approach, which extends an acquisition effort. In May, long after the dot-com bubble burst, Cable and Wireless agreed to pay $340 million for the Web site manager Digital Island of San Francisco.
Cable and Wireless stock fell to its lowest level in a decade after the Sept. 11 attacks, though it has recovered some ground. The stock is down 68 percent from its 52-week high set last Jan. 10, closing last week at 326 pence ($4.73) in London; the American depository receipts, each representing three ordinary shares, closed at $14.65 last week, off a similar level from their 52-week high set on Jan. 11.
Still, Cable and Wireless is pursuing its acquisition strategy at full speed. Earlier this month, it offered to buy the Japanese operations of PSINet, a bankrupt Internet services company, for about $10 million in cash and $25 million in assumed liabilities. But the Exodus deal would far outstrip previous efforts.
It would be one of the biggest bets on the potential of high-end communications services like Web site management and high-speed Internet voice and services for businesses with offices around the world. The acquisition will be expensive, at about $300,000 a customer, said Cyrus Mewawalla, an analyst in London with Nomura International.
The hefty price has left some investors wondering why Cable and Wireless thinks it can make money providing Internet services to businesses where Exodus and its competitors could not.
Mr. Wallace, the chief executive, said he was persuaded of the opportunity to form a profitable global communications network by serving a growing market efficiently. Cable and Wireless expects the Exodus assets to turn a profit by 2005.
Together with capital spending and a plan to buy back up to 15 percent of Cable and Wireless's stock, the Exodus acquisition would deplete Cable and Wireless's cash from about $6.8 billion, to about $2.9 billion. Alarmed by the risks associated with the attempt to buy Exodus, the rating agency Standard & Poor's revised its outlook on Cable and Wireless this month to negative from stable.
The performance of Global, the unit that provides voice, data and Internet services to businesses, explains the concern over efforts to expand the operation through costly acquisitions. For the six months ended Sept. 30, the unit accounted for 71 percent of overall revenue but just 16 percent of earnings, before charges.
In addition, Cable and Wireless has been hurt by the same fierce competition in long-distance service that has hurt companies like AT&T and WorldCom. Margins for the Global unit fell to 2.7 percent in the second and third quarters of this year, down from 13 percent in the comparable period the previous year, according to Standard & Poor's.
The troubling performance of the Global unit reveals the importance of Regional, the subsidiary that provides telephone service in 26 locations in the Caribbean, Panama, the Middle East and islands in the Atlantic, Pacific and Indian Oceans.
Regional accounts for just 28 percent of sales but for a whopping 95 percent of profit, before charges. Because many of its operations are monopolies, they are quite profitable, lifting the unit's margins to 43 percent. The elimination of 7,000 jobs this year, which brought the company's work force to about 24,000, should help lift overall margins the next six months, a Cable and Wireless spokesman said.
The trouble is, like St. Lucia, other island authorities are taking steps to end Cable and Wireless's monopoly. Cable and Wireless threatened earlier this year to withdraw completely from St. Lucia, a former British possession of 160,000 people, if its monopoly was broken.
But Cable and Wireless backed off after Mr. Anthony, the prime minister, banded with four of his counterparts in the eastern Caribbean, who threatened it with expulsion from their lands if it abandoned St. Lucia. A deal was reached that opened the way for competition in St. Lucia and eventually in neighboring countries. Keith Mitchell, Grenada's prime minister, led the negotiations that brought Cable and Wireless' agreement to operate in competitive markets to fruition.
Deregulation started in Jamaica last year after mobile licenses were granted to two competing companies. In Bermuda, which, like St. Lucia, is a former British possession, the government opened its telecommunications market in 1996, permitting TeleBermuda, a unit of 360networks of Canada, to provide international services.
Peter Eustace, a spokesman for Cable and Wireless, said it welcomed the opening of markets where it operated as long as clear rules were established so everyone could compete equally.
"We think competition is healthy in the long run because that will help these markets to become more sophisticated, with more revenue-generating possibilities for everyone," Mr. Eustace said.
Still, it may be too early to tell how deeply these efforts will erode profits at Cable and Wireless's most profitable arm, although analysts are already voicing concern. Mr. Eustace said recent reports in Britain that said a sale of the Regional properties was planned were unsubstantiated.
"Ongoing deregulation could pressure earnings," said Peter Kernan, an analyst in London with Standard & Poor's. The unit "will also continue to face a relatively high degree of political and economic risk, although this is mitigated by a well-diversified business portfolio."
Some of Cable and Wireless's smaller holdings are well protected from competition. For example, on Ascension Island, almost equidistant in the Atlantic Ocean between South America and Africa, it provides all international communications and operates the Ariane Earth Station, which is used to monitor European Space Agency launchings.
Similarly, Cable and Wireless is the exclusive provider of telephone services in Diego Garcia, the island in the Indian Ocean that serves as an important base for the United States military installations used to carry out bombing raids in Afghanistan.
For the time being, there is no question that the complex task of reconciling such faraway operations with the cutting-edge but unprofitable assets resulting from Cable and Wireless's acquisition strategy is weighing on the company.
"When a company spreads itself too thin, something has to eventually give," said Mr. Mewawalla, the Nomura analyst, who has a sell recommendation on Cable and Wireless stock. "Using its profitable operations to finance such a risky expansion strategy is not something that can be sustained in the long term."
Copyright 2001 The New York Times Company |
