Cable & Wireless Fails to Convince Investors of its Strategy
By Anjana Menon
London, March 19 (Bloomberg) -- The first thing Graham Wallace did when he took charge at Cable & Wireless Plc in 1999 was replace the oil portraits of the U.K. company's past leaders in his office with colorful prints of soccer players in action.
``We are a fast-moving company and this is more in keeping with our image,'' said the 51-year-old executive.
Wallace sold $6 billion worth of assets and built the world's third-largest network for Internet service providers. Investors believed his strategy of focusing on business uses for the Internet made the company different from phone companies which invested billions on consumer demand for wireless Internet access.
Until last week. Cable & Wireless shares have fallen 33 percent since Tuesday after it said revenue from data and Internet businesses would fall short of expectations as rising competition forced down prices for network capacity to carry voice and data. Wallace moved fast, but the world moved faster.
``We don't know what the company's strategy is going forward -- they haven't told us of a new one,'' said Nick Delfas, an analyst at Lehman Brothers. ``The problem is the huge amount of network capacity coming on stream in Europe and the U.S. and whatever they say will be met with some skepticism.''
Too Much Supply
Expectations about demand for Internet services led Cable & Wireless and competitors such as Colt Telecom Group Plc to increase capacity on their networks. Because demand hasn't met those expectations, prices have fallen.
Schroder Salomon Smith Barney estimates that prices to transmit voice and data over networks will fall 44 percent a year for the next ten years, leaving little room to make money on offering the services.
So far, Cable & Wireless has been victim of those price declines. Last week, it said prices for services such as Internet connections were ``reduced by up to 50 percent per annum,'' in the U.S. In Japan, the costs of carrying voice calls internationally has dropped 40 percent in ten months, it said.
The London-based company also said revenue at the company's biggest division, Cable & Wireless Global, will rise only 12 percent from a year ago. Some analysts expected a 20 percent gain in full-year revenue.
In a November meeting to announce the company's interim earnings, Wallace said he expected ``strong revenue growth.'' Investors in the last two months cited Cable & Wireless as a ``defensive'' telecommunications stock because of a steady revenue stream and cash in the bank.
Credibility Problem
At least four analysts polled by Bloomberg News said the severity of the decline in prices for services and the fall in operating margins took them by surprise.
``I liked the stock, but I'm not so sure now,'' said Tristan George, manager of the Mayflower British Leaders Fund who is ``overweight'' on the stock and will wait for prices to recover before paring his holdings. ``There is a management credibility problem here -- the profit warning announcement wasn't that straightforward and that isn't good in a nervous market.''
Analysts are also skeptical the company will meet its earnings before interest, taxes, amortization and depreciation margin of 25 percent by 2004, in the main Internet business. In fiscal 2001 that number will be 8 percent, because of the pressure on margins from overseas operations. Analysts expected margins of 13 percent.
Some of those goals may be hard to achieve, analysts said. Rival Global One, owned by France Telecom SA, has lost $2.7 billion since its inception. The company relies almost entirely on carrying data.
``There is no reason to believe that the long distance market for data will be more lucrative than voice,'' said Delfas, who has a ``market perform'' rating on the stock.
New Image
The 123-year-old company, which once owned one of every three miles of telegraph cable in the world, had been searching for a new image ever since its effort to merge with British Telecom to form the world's largest phone company fell apart in 1996.
Between 1996 and 1999, the company sold its cable TV business to NTL Inc. and its wireless phone unit, One 2 One, to Deutsche Telekom AG.
A company ``that wants to be everything to everyone will fail,'' said Wallace. ``Our future growth will come from data and Internet.''
To move to telecommunications services aimed at corporate customers Cable & Wireless bought the Internet network MCI had to sell to win approval for its merger with WorldCom Inc. for $1.75 billion, and bought IDC in Japan for $345 million.
Cable & Wireless, the third biggest Internet access provider to businesses in Europe after WorldCom and KPNQwest NV, is investing $3.5 billion in building out a global high speed network -- that's helped it to have the fewest disruptions to carrying calls compared with rivals. It carries all the traffic for Yahoo! Inc. in Europe.
Last week it said it will scale back its spending on building networks significantly. It did not specify what that amount would be.
Cable & Wireless is also seeking acquisitions to expand the range of services it can offer businesses. The company aims to introduce an average of 40 new products, including customized software for companies that sell products over the Internet, every six months.
Low Margin Exposure
``The company is still very much exposed to the low margin business of carrying voice and data for other telcos,'' said Kevin Fogarty, analyst at Teather & Greenwood Holdings in London, who has cut his recommendation on the stock to an ``add'' from a ``buy''. ``They need to accelerate the transformation process,'' but won't see big improvements in the coming fiscal year, he said.
To offset falling prices, Wallace has made acquisitions to add services such as hosting Web services and enabling electronic commerce for customers.
He's struck partnerships with Microsoft Corp., Intel Corp. and Nortel Networks Corp. to offer a range of services from warehouses for storing data cellular phone companies to software that detects credit limits and frauds for online retailers.
``They don't have the sales force to market these products -- it's a question of getting these services to customers and they don't have the massive presence needed for that,'' said Paul Sharma, an analyst at JP Morgan Chase in London.
Wallace said his partnerships with Microsoft and others should help him market the services.
And the company could increase its war chest significantly. After shedding its U.K. mobile phone and cable television businesses, Cable & Wireless is selling its 53 percent stake in Australia's second-biggest phone company, Cable & Wireless Optus Ltd., which is worth $4 billion at current market prices. It also has about $2.7 billion in shares of Pacific Century CyberWorks Ltd. and NTL.
Though the company has ruled out a share buy-back, last week's 33 percent drop may make Wallace reconsider.
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