C&W Sells US Albatross

C&W's US domestic business goes into Chapter 11 as it finds a buyer for its decimated hosting empire

December 8, 2003

3 Min Read
C&W Sells US Albatross

Cable & Wireless plc (NYSE: CWP; London: CW) has finally found an exit from the U.S. domestic market, with the sale of its hosting and IP solutions assets to investment group Gores Technology Group LLC for $125 million (see C&W US Sells Asset for $125M).

The deal marks the end of a U.S. nightmare for the operator, which, just as the market was becoming saturated, spent more than $1 billion on hosting assets that became an albatross around the carrier's neck. The costly foray was one of the main catalysts for a management shakeup and change of strategy at C&W.

Under the terms of the deal, Cable & Wireless USA Inc. and Cable & Wireless Internet Services Inc. and their subsidiaries have filed for Chapter 11 protection. The operator says this will "facilitate the sale," as it will allow Gores to purchase the assets it wants without having to take on any of the business's current liabilities.

In addition, C&W is providing up to $100 million in new funding to the U.S. operations to take it through bankruptcy protection and ensure business continuity. During this period, the U.S. business has been set a number of performance goals related to "working capital, revenue, and certain overhead expenses" that must be met if Gores is to pay the full price ($50 million in cash and $75 million in loan notes), though the sale price cannot fall below $50 million.

The main aim of the U.S. team, now under new management (a new CEO and CFO appointed from turnaround specialists AlixPartners LLC), is to renegotiate commercial contracts, such as leases, and cut other costs.

The business currently has about 1,700 staff and generated revenues of $264 million in the six months to September.

C&W will use the sale proceeds to pay off some of the liabilities, and the operator estimates that the additional cost of exiting the U.S. business (including the $100 million in new funding) will come in at no more than £300 million ($520 million), way below many analysts' estimates. Lehman Brothers, for example, thought the costs would be as high as £750 million ($1.3 billion).

The deal gave C&W's share price a boost on the London Stock Exchange: It ended the day up nearly 4 percent at 134.8 pence, though early in the day it was up by nearly 10 percent.

Gores did not return calls regarding its plans for the C&W assets.

C&W confirmed that the sale did not include any part of the network that supports its ongoing international service operations, where it targets other service providers with transit services and large enterprise users with various types of VPNs (see Report Unveils Top IP VPN Providers).

The deal marks the end of a disastrous chapter in C&W's international story. It piled into the hosting business by acquiring Digital Island in May 2001 for $340 million and Exodus Communications for $750 million in February 2002, arming itself with costly and long-term property leases just in time for the market to crumble into powder.

C&W has spent the past months scaling down the business, closing eight hosting centers and consolidating customers into its remaining 15 sites, and cutting staff. C&W USA claims to have 40 percent of the Fortune 100 companies among its customers.

The financial markets have responded to C&W's transformation. The operator's share price has improved dramatically since it announced a change of direction late last year and a boardroom shuffle at the beginning of 2003 (see C&W Plans Global Reorg, C&W Appoints Chairman, and C&W Puts New Duo in Charge). It hit a 12-month low of 44 pence last December, but has risen steadily since the new chairman, Richard Lapthorne, was chosen in January.

— Ray Le Maistre, International Editor, Boardwatch

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