C&W Says Ciao to Caio

Cable and Wireless plc (NYSE: CWP) today showed how tough it is for traditional telecom operators to revamp themselves by announcing a corporate reorganization that sent its share price plummeting by 15 percent. (See C&W Splits, Ditches CEO.)

Its latest move is to split its operations into two units -- one for its U.K. business, one for international (Macau, various Caribbean islands, Panama, Monaco, and others) -- each of which will have its own management team.

That change means there's no ongoing role for current group CEO Francesco Caio, who will leave at the end of the financial year (March 2006) after nearly three years in the hot seat. (See C&W Puts New Duo in Charge.)

C&W also warned that its earnings before interest, tax, depreciation, and amortization (EBITDA) for the U.K. business (excluding its Bulldog broadband operation) will remain flat in the 2006/2007 financial year. The carrier cited "continuing margin erosion, high levels of churn and the acceleration of the switch from legacy services to IP" as one of the main reasons for the flat outlook.

The news had analysts scurrying for their calculators. In an emailed research note, the carrier team at Lehman Brothers reckon they'll have to cut their 2006/2007 EBITDA forecast of £273 million ($484 million) for C&W by about 20 percent as a result of the new forecast, and that the carrier's annual earnings per share (EPS) could be hit by up to 50 percent.

That profit warning was the bombshell that sent the operator's stock into freefall. By mid-morning on the London Stock Exchange C&W's share price was down 16.75 pence, almost 15 percent, to 97.75 pence.

C&W is undergoing major changes in an effort to remain relevant in an increasing IP-centric industry, especially as main rival BT Group plc (NYSE: BT; London: BTA) builds out its next generation network, the 21CN. (See BT Takes 21CN 'Baby Step'.)

In the past two years C&W has made a number of structural and personnel changes, announced a significant network transformation project, and acquired broadband service provider Bulldog and U.K. alternative carrier Energis. (See C&W: Not Just a 'Pretty Network', C&W Wins Over Energis, C&W Plans Its Own 21CN, C&W Buys British Bulldog, C&W Has $150M Broadband Plan, and C&W Chops & Changes.)

But even the ongoing next generation network transformation project isn't going smoothly for C&W. (See Tellabs, C&W Part Ways.)

The latest upheaval will likely lead to the complete separation of the two businesses, "perhaps involving private equity given today's climate," reckons Ovum Ltd. analyst Julian Hewett, though C&W has said this isn't part of its plans. (See Eurobites: A Private Affair.)

Hewett also notes that C&W chairman Richard Lapthorne is "sticking to his end game" for the U.K. operations (wholesale and enterprise customers) -- as outlined in November 2005 -- of more than £2 billion ($3.54 billion) in revenues with an operating margin in double digits once the new IP network is completed. (See C&W Reports H1.)

The analyst believes the C&W chairman "may live to regret his forecast." In a research note, Hewett says the "enterprise telecom market has always been extremely tough, with very competitive and highly demanding customers -- both in terms of requirements and negotiating skills -- resulting in low margins. Is the move to IP going to make any difference? Probably not."

So who has the unenviable task of proving Hewett wrong? Former Energis CEO John Pluthero will be group managing director and chairman of the U.K. division, while Jim Marsh, current director of retail in the U.K., will be the division's CEO.

Harris Jones (aka 'the man with two surnames') will be group managing director and CEO of the international division, while group deputy chairman Lord Robertson of Port Ellen will act as non-executive chairman. Pluthero and Jones will report to group chairman Lapthorne.

— Ray Le Maistre, International News Editor, Light Reading

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