Shares in Cable and Wireless fell sharply after the UK’s second largest telecommunications network operator warned that margins in its domestic corporate business were weaker than expected in the first half.

In a trading statement ahead of its interim results early next month, the company said a number of factors including continued “challenging” market conditions in the UK had hit the performance of its core telecoms services business.

The company said although its revenue guidance was in line with expectations, the mix had tilted significantly towards the much lower-margin wholesale business.

The proposed £720m takeover of Energis also appeared to have hit its financial performance. C&W admitted that since the deal was announced in August there had been “some loss of momentum in sales planning”. Moreover, it said it had halted a number of cost cutting initiatives ahead of the takeover “in advance of a clearer understanding of the requirements of the combined business”.

On top of this, C&W said the rate of transition of clients from its legacy network to IP-services is speeding up, leading to further cannibalisation of evenues as the new technology offers clients much lower-cost services.

Investors showed their displeasure sending the shares down more than 14 per cent to close 20p lower at 121¾p.

The sharp fall demonstrates how fragile sentiment is towards the company, which has had a torrid time in recent years, particularly in the core UK business where overcapacity among fixed-line operators has led to a fierce price war.

Some analysts questioned whether the profit warning might also flag problems with the Energis deal. C&W said yesterday that following exchange of information with the Office of Fair Trading it was “now possible the the approval process will take longer than originally anticipated.” Management was hoping to get clearance by the end of this month and thought it unlikely the deal would be refered to the Competition Commission.

The company said on Friday the delay “neither increases or decreases the likelihood of a referral.”

But Christian Maher at Investec, who cut his EBITDA forecast to March 2006 by 26 per cent on the back of the profits warning, questioned whether the suspension of the cost saving measures should be ringing alarm bells.

“This would seem to suggest that there could even be doubts over the Energis deal actually going through. A referral to the Competition Commission could delay the deal by six months and would be very negative given the erosion in sales this deal already seems to have caused.”

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