C&W goes from bad to worse

“This is the most difficult job I have ever had to do,” Richard Lapthorne says about being chairman of Cable and Wireless.

Few would disagree. After yesterday’s warning on profits, investors knocked 10 per cent off a share price that had already lost a third of its value since the summer.

In some circumstances, a severe warning accompanied by the reorganisation of the group into two distinct units might encourage speculation that a lucrative break-up was imminent. Here, the share price tells a different story.

“It is beyond dire,” says Christian Maher, an analyst at Investec.

Francesco Caio, chief executive for the past three years, is paying the price. He is leaving with a pay-off.

Many thought C&W had turned the corner last summer with its £600m acquisition of Energis.

Now they realise that it continues to suffer heavily from customer defections and margin pressure in the UK.

Profit growth, it seems, will be non-existent next year.

But what makes the latest news from C&W particularly “dire” is the fact that even previous years’ growth appears not to have been quite what it seemed.

The company yesterday admitted to a string of previously undisclosed “non-recurring items” that would make a “major contribution” to this year’s UK earnings.

It then warned that these items, which had not been identified in previous accounts as “non-recurring”, would not be repeated next year, wiping out any earnings growth the City had been expecting.

The company says that about half the £150m of earnings before interest, tax, depreciation and amortisation that analysts had predicted for the current financial year were attributable to these items.

How many years’ earnings have included similar items is unclear. “A number of years,” the company says. “It hasn’t really mattered [up till now], the time it becomes an issue is the time that it stops,” says Mr Lapthorne.

A former finance director of British Aerospace, he adds: “The accounting is dead right. Whether or not it was clear enough in briefing sessions [with analysts] I don’t know because I wasn’t there.”

He goes on: “What is a one-off item when you are trying to run a business more tightly is hard to define . . . and I can understand that people are uncomfortable about it. It could have come as a surprise.”

“Uncomfortable barely covers it. We are completely bemused,” says one analyst, adding: “It is now January 2006, why have they not mentioned anything about this before?”

The company says these items, which include settlements of disputes with customers and suppliers, could not be termed “non-recurring” under accounting rules. While analysts may accept that, they question why they had not been told earlier.

“The overriding sense we have is a company with no visibility in terms of financial control,” says Mr Maher of Investec.

The conclusion, for many analysts and investors, is that C&W’s business is in even worse shape than they realised.

“They are in the last-chance saloon,” says one analyst. “The problems in the UK business are in large part due to the failure at group level to ensure management stability.”

Another adds: “The UK [business] is difficult to sell in its current condition and requires at least another two years of re-engineering.”

The UK market is highly competitive and C&W – the second biggest supplier of corporate fixed-line telecommunication services after BT – is struggling to cope with lower prices.

Mr Lapthorne has effectively given up on the legacy business in the UK and is banking on the Energis management to migrate the old C&W client-base to the Energis business model.

The task of fixing the UK business falls to John Plutero, who was Energis’s chief executive. He was already running C&W’s enlarged UK business but now becomes joint group managing director. He will be supported by Jim Marsh, the former Energis head of sales, who will act as chief executive of the UK.

Harris Jones, the other new joint managing director, has the easier task. He will continue to run the group’s cash cows – a group of national telecom operators in the Caribbean, Panama, Monaco and Macau.

But the problems they have inherited from Mr Caio are also in part Mr Lapthorne’s. He has been chairman since January 2003.

Should he have stepped down instead? “Absolutely – if investors wanted me too.” But, he adds: “There is tremendous investor support.”

Two shareholders appear to back him. Derek Stuart, a fund manager at Artemis, which holds about 2 per cent of C&W, says: “It is a good idea to split the group, as long as it releases value.”

Another top ten shareholder says he will continue to support the company as it sought to achieve its goal of delivering a £2bn revenue business in the UK with double digit margins.

He says C&W has warned shareholders they “would be in for a bumpy ride.”

Additional reporting by Kate Burgess