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Optical/IP

C&W Shares Plunge

Shares in the U.K.'s second largest operator, (NYSE: CWP; London: CW.L), plummeted more than 16 percent, one fifth of its value, this morning following a less than rosy trading update. (See C&W Issues Update.)

C&W estimates revenues of £765 million (US$1.36 billion) for the first half of the financial year, down 6 percent from £810 million ($1.44 billion) in the first half of the previous year. Sounding the familiar refrain of "challenging" U.K. market conditions and "downward pricing pressure on legacy revenue," the operator points to a shift in revenue mix. It's seeing weaker sales in its retail business, with revenues expected to fall 13 percent, while it estimates a pickup of only 3 percent in lower-margin wholesale services.

In a note to investors, Lehman Brothers analyst Graeme Pearson points out that wholesale carrier services now account for 51 percent of total revenues, compared with 46 percent in the first half of last year and 44 percent in the second half, resulting in weaker margins overall.

Although Cable & Wireless says the revenues are in line with management expectations, Pearson says the £765 million figure is 4 percent below Lehman’s estimate of £794 million ($1.41 billion).

Revenues for C&W's Bulldog Communications Ltd. local loop unbundling (LLU) broadband business are expected to be £13 million ($23.12 million), missing Lehman's expected £16 million ($28.46 million). The carrier blames "the shortcomings of the BT automated process" for slowing down its ability to switch on new customers, and says it has temporarily deferred sales and marketing while the Office of Communications (Ofcom) investigates.

"In our view this underlines our case that the business model for LLU competitors remains challenging," writes Pearson.

C&W notes that "there has also been some loss of momentum in sales planning" since it announced its acquisition of Energis plc (OTC: ENGSY), confirming what rival (London: THUS) said in its trading update last week -- that there are benefits to losing out on the bid: Namely, C&W is now tied up in the integration process and THUS gets to pick up new business. (See THUS on the Prowl and C&W Wins Over Energis.)

On the acquisition itself, C&W says it has received an outline of possible issues with the transaction from the Office of Fair Trading and warns the approval process will probably take longer than expected. Pearson writes, "although the Energis transaction was well received we continue to regard its integration given [its] track record as challenging, while our fundamental opinion on Bulldog economics remain negative."

By midday, shares in the company were down 22.75 pence, a whopping 16.05%, to £1.19 ($2.12) on the London Stock Exchange.

— Nicole Willing, Reporter, Light Reading

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