Shares in Cable & Wireless were hit hard after the second largest telecoms group in the UK predicted that its first half sales would fall by 6%. It compounded the bad news with an additional warning that the completion of the acquisition of alternative telecoms provider Energis Communications could be delayed as approvals from the UK Office of Fair Trading took longer than expected.
Unfortunately for C&W, the market viewed its prediction that sales would fall by 6% in its core market as a profit warning, and consequently the carrier’s stock price on the London Stock Exchange fell by a staggering 16%. To put this fall into context, the drop means that C&W has lost almost a fifth of its value and has seen the biggest fall in its stock price for nearly three years.
C&W said the performance was in line with its expectations, but noted a worsening shift in its revenue mix from retail to carrier services, with weaker margins in the retail business, as customers demand new Internet-based services rather than the more lucrative traditional fixed-line phone connections.
In a statement the carrier estimated that total revenue for its UK business in the six months to September 30, 2005 would fall to GBP765m ($1.35bn) from GBP810m ($1.42bn) in the same period last year. It also predicted that retail sales, made up of revenues from selling telecoms services to businesses, would fall 13% to GBP375m ($661m).
Its carrier service revenues, made up of selling wholesale capacity on its network to other telecoms operators, rose 3% to GBP390m ($688m).
Looking forward, C&W tried to put a positive spin on its affairs by saying it was still expecting a satisfactory outcome for the full year, despite tough conditions in the UK, mainly because its business overseas – notably in the Caribbean – continued to perform well.
However, there are market concerns that C&W’s Bulldog Internet business, is continuing to under-perform, although the business was too small to have meaningful impact on group forecasts. Despite that, C&W said Bulldog would post a first-half revenue of GBP13m ($23m).
It was in the middle of August that C&W finally announced the acquisition of corporate telecoms rival Energis, for as much as GBP709m ($1.25bn). However C&W has admitted that it had seen some loss of momentum in sales planning since the announcement of the Energis deal. This is somewhat ironic, considering that it was hoping the Energis buy would ease the fierce competition it is facing in the UK market, where a combination of excess capacity and falling prices, are hurting profit margins.
C&W had been hoping to close the Energis deal sometime in the third quarter, however delays at the UK’s Office of Fair Trading means that it is possible that the approval process will take longer than originally anticipated, C&W said in the statement.
The Office of Fair Trading has required a wealth of information to make an informed decision on whether to refer the acquisition to the UK Competition Commission, C&W said. Meanwhile, the company has reportedly opted to shelve some plans to cut costs until it ascertains the needs of the combined businesses.