Is Cable & Wireless again considering a demerger?

Saturday, November 21, 2009 11:36 AM

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Business

What does it mean for the Caribbean?

By Al Edwards

Friday, October 30, 2009

The British integrated telecommunications behemoth that is Cable Wireless (C&W) may well be again considering demerging its operations according to press reports earlier this week.

According to Commsday.com, "The company is working on a scheme to spin off the corporate telecoms arm from its international business,CWI, which serves markets from Panama to Afghanistan. The split could be announced as early as November 5 to coincide with C&W's half-year figures, though it may be delayed further by market conditions. Moreover, the management team's long term incentive plan has been extended to March, by which point the firm hopes to have completed the change. A demerger could boost the share price, which has not kept up with the stock-market rally."

C&W business is separated into two units, namely Cable&Wireless Worldwide (formerly Europe, Asia and the United States) which is largely active in the UK and Cable& Wireless International. Each unit has its own balance sheet and Profit and Loss accounts. Last year C&W considered demerging the two units and selling one or other of the units in an effort to garner greater shareholder value as well as avert continuous lacklustre performances.

"Having considered its value realisation options, the board favoured demerger of Europe, Asia & US from the existing Cable & Wireless Group to create two new listed companies. However following the recent unprecedented financial market turmoil and volatility the board has decided to postpone making a final decision," read a C&W press release issued last year.

The Caribbean

With the ravishes of the recession seemingly abating and equities market once again on the rise, C&W may well consider it propitious to reactivate their demerger plans and put a for sale on either of the units which means it may well be dressing up for potential suitors.

So what does that mean for the Caribbean? C&W Americas and Caribbean operations has combined revenues of 800 million pounds thereby contributing the lion share of C&W International's 1.2 billion pound turnover.

The Caribbean's operations have come under siege particularly in the mobile market by Denis O'Brien-led Digicel and exacerbating matters further is the severe downturn experienced by many Caribbean economies.

Digicel took the decision to focus on the growing mobile market and entered markets that other telecom giants would not even consider. Almost a decade on some of those same players are seeing value in going into emerging markets. Digicel superseded C&W and is now the dominant force in mobile telephony in the region.

Facing pressure in the Caribbean and its regional boss Chris Hetherington sacked last year, the company has decided to cut costs. Last year it rebranded as LIME and slashed 3,000 jobs across the region. The impact of the move is yet to be felt as it continues a rear guard fight. Domestic fixed line minutes fell by nine per cent in the first quarter in the Caribbean while average revenue per mobile user is down eight per cent. Many people in the Caribbean are opting for mobile phones rather than relying as they did in the past on fixed lines and this has hurt C&W.

Moreover, it is yet to shrug off the stigma of an insensitive monopolistic lumbering giant that does not recognise the needs of its customers. It has yet to successfully implement innovations that catch the imagination of the public and bring kudos to the brand.

One of the problems it faces is the high turnover of senior executives. In Jamaica alone, it has had six CEO's over the last eight years and within the last two years Richard Dodd, Harris Jones and Chris Hetherington have all departed. It may well be the case that senior personnel are not given enough time or autonomy to turn things around as their masters in London expect immediate results.

An ING forecast released last month read: "The July trading statement warned that the downturn in the Caribbean is intensifying in several of the local economies. As a consequence, domestic fixed line usage and mobile pricing has been under pressure. We detect no sign of any improvement and have cut our revenue expectations accordingly.

"A further challenge for the company is that sterling has appreciated against the USD of late, which hurts the translated figures but even the USD reported numbers will have been impacted by a weaker Jamaican dollar. It should be possible for this to be communicated effectively to investors but in the past reporting weak headline numbers has not been helpful for sentiment."

C&W has said its forecast for group earnings is approximately 1.03 billion (US$1.69 billion) based on a exchange rate of US$1.50 to one pound.

For some time now, speculation has persisted that Carlos Slim's America Movil will be making a move to acquire C&W's Caribbean operations thus providing a beachhead into the English speaking Caribbean. Plagued by a contracting market, an ascendant rival, increasing operating costs and the added pressure to provide shareholder value, a sale to America Movil has its merits. However, it must be said such a move may well displace the staff compliment who will have to contend with an altogether different corporate culture. C&W has engaged in protracted legal balltles with its main rival Digicel and may well be happy for a respite, happy for someone else to continue to fight.

The notion of selling its Caribbean assets was not lost on international investments house JP Morgan who wrote in June of this year: "Management sees no regulatory constraints to crystallising value in the Caribbean through asset disposals to rival operators. However local governments are keen to have dependable owners for assets with solid telecoms experience. It seems that management is quite open-minded to options but has a very clear focus on shareholder value."

Asked about a potential demerger, C&W's finance director Tony Rice said last year, " We have still got to nail further progression on cash flow, we need a self standing business - a good performance in the next few months and it will be self-standing from a credit point of view.

"There are a number of options. Obviously there is a demerger, rationalisation of the portfolio or leveraging and returning capital to shareholders, and we are looking at all of those."

The Caribbean's operations have come under siege particularly in the mobile market by Denis O'Brien-led Digicel.

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