our old friend CWP: -
How often do you hear -- and this column isn't innocent -- that a stock
buyback would support some beleaguered company's share price? Plenty.
Well, the next time an analyst or journalist cheerily offers that "the downside is
limited" thanks to an aggressive buyback program, point out Cable &
Wireless's woes.
Last November, C&W, flush with about £6 billion in cash from some
well-timed asset sales and under heavy pressure to "do something," began
buying back a ton of its own shares. And it didn't stop until it had scooped up
some 15% of the outstanding by the end of last month, according to figures
from WestLB Panmure. The result? The stock fell 44%, from as high as 380
pence in mid-November to 213.75 now. Its ADRs closed around 9.27
Friday. "About 1.1 billion pounds of shareholder money expended provided
no support for the price," notes Benedict Evans, a telecoms analyst at
WestLB Panmure, London.
The timing was awful. Hostile sentiment against telecoms stocks in general and
so-called alternative telecoms, in particular, worsened, and it remains
pervasively negative. Over the last 12 months, the European telecom group is
down 32%, far worse than all other sectors in Europe.
Yet, the sagging stock price is all the more interesting because a
sum-of-the-parts evaluation suggests that the market is essentially betting that
C&W management will destroy value. Analyst Evans, for example, notes
C&W still has about £2.3 billion or about 125 pence per share in net cash on
the books now, and that its various regional incumbent telecoms businesses,
mostly in the Caribbean, are worth arguably 80 pence per share. That leaves
a scant 8.75 pence for the C&W's future supposed growth engine, the global
division.
Over the last few years, CEO Graham Wallace has sold off most of C&W's
traditional wireline and wireless telecoms business around the world, at near
top-of-market prices. This was done to refocus on that global division, which
provides snazzy new alternative telecommunications services for business
customers like Internet-protocol and data-telecommunications services, as
well as Web-hosting. C&W has invested in fiber-optic networks in
anticipation of strong growth for IP-driven voice and data traffic. But the
highly-competitive industry is suffering from an enormous excess capacity,
lower-than-expected demand for fiber capacity by both businesses and
telecom operators, and falling prices.
In February, the company lowered its guidance to a 10% revenue decline
from a 5% drop in the global division for the fiscal year just ended in March,
2002. That wasn't the first disappointment, and Evans says he doesn't expect
any growth this year in that division.
C&W's management is in a "weird" bind, he opines. If C&W uses its hoard of
lucre to buy more cash-burning alternative telecom assets like Exodus and
Digital Island, the market will hammer it. If the company just sits on the cash,
it'll be criticized. And clearly, the buybacks haven't worked.
Yet those buybacks came under duress, after strong lobbying by
shareholders, asserts James Clunie, head of global equities at Aberdeen Asset
Management. CEO Wallace "has been a bit unlucky," avers Clunie, who adds
management has fallen out of favor with UK money managers.
On valuation grounds, C&W looks cheap, though that was also the case last
October when this column first noted that cash made up more than 50% of
the market capitalization, as now. The stock is at an eleven-year low. On
price to book, the shares trade at around 0.4 times, though some of the
telecom assets on its books probably are overvalued. On price to sales,
C&W trades at about 0.84 times. The latter measures are far lower than
other telecom stocks. And, there's the cash in hand.
The key to C&W is whether the global division will be a cash producer or
cash vampire. "The global division continues to be hugely cash consumptive,"
Evans contends. The company replies that Global will be
free-cash-flow-neutral (that's adding back capital expenditures to earnings
before interest, depreciation and amortization expense) in the year ending
March, 2004 -- implying it will be negative in the current fiscal year.
That's the value destruction the market is worried about.
Clunie says that until there's more evidence, investors should make a
conservative assumption of middle-single-digits long-term growth for the
global business. In that case, there's probably long-term value and upside in
the shares, he believes, perhaps 50% or more in a few years. Unlike other
hard-pressed alternative telecoms firms, it's not a question of survival for
C&W -- because there's that cash again.
Some feel the company hasn't disclosed enough. As Henry de Vismes, a
managing director at Citigroup Asset Management, notes, C&W is going to
have to demonstrate where the volume growth is going to come from in the
Global division, which parts are profitable and which not. "It's a show-me
stock now."
If the market's ugly telecoms mood doesn't change, C&W will need to put on
a pretty convincing show come May 15, the next scheduled reporting date. If
ignored, the market will just go on assuming the global division is destroying
value. It's up to management to prove otherwise. |
