Graham Wallace’s survival as chief executive of Cable & Wireless Group Plc looks increasingly in doubt after the company’s share price crashed 43% on news that the company’s cash pile may be far smaller than expected.
It could be forced to put 1.5bn pounds ($2.4bn) of its 2.2bn pound ($3.5bn) cash balance in escrow under a deal it negotiated in 1999 when it sold its 50% stake in wireless operator One2One to Deutsche Telekom AG for 3.45bn pounds ($5.5bn). C&W said it is normal in such circumstances to cover Deutsche Telekom for any tax liabilities.
The downgrading of C&W’s bonds to junk status has triggered a clause in the deal that forces it to put its own cash on the line in case the UK tax authorities swoop. C&W’s cash pile was one of its few redeeming features after Wallace’s strategy of turning the company into one of the internet’s major players left the company reporting a $7.3bn first-half loss in November and cutting back its operations.
Combined with an 800m pound ($1.3bn) restructuring bill, the 1.5bn pounds ($2.4bn) frozen as a result of the Deutsche Telekom deal would account for C&W’s net cash reserves. As Wallace forecasts that the global operation will not become free cash flow positive until March 2004, the company faces a difficult few months.
Angry investors have already forced the board to look for an outsider as the next chairman of the company, hoping for someone who can rein in Wallace’s ambitions. But this new and enormous financial set-back could force the present board to take action.
The problem is that the tax authorities move exceedingly slowly and C&W acknowledged that it could still take several years to resolve, leaving it in a financial straightjacket. C&W said its own advisers had said there would be no financial liability, but Deutsche Telekom, which is facing its own debt problems, is hardly likely to let C&W off the hook. The only way out of the problem would be for C&W to apply pressure to get the tax authorities to make a speedy decision on the deal.
With goodwill for C&W long exhausted in the investment community, there was annoyance that the company had not revealed the potential problem earlier. But then until recently, it seemed incredible that a cash-rich company such as C&W would have its bonds relegated to junk status.