Why doing the splits could be good for Cable & Wireless

Cable & Wireless is an interesting firm with a long history and chequered recent past. Its immediate future looks exciting too as the telco prepares to do the splits.

The uncoupling of its CWI international business from the Worldwide arm should be complete by the end of March.

However, in the next fortnight we should learn a great deal more about the future shape of the two businesses as C&W publishes what’s called a demerger prospectus.

C&W has already offloaded its stakes in the Hong Kong phone network

It should give some insight on strategy, dividends and how the pension fund is allocated.

Analysts estimate £75m will have to go into the retirement pot before the break up can go ahead.

C&W has already given a broad outline of the company’s £1.1bn refinancing plans, which will leave the Worldwide operation with access to around £500m of funds.

The demerger is the latest chapter in what is already a very colourful corpo-Founded more than 130 years ago, C&W was part of the consortium that laid the original telegraph cable across the Atlantic in the late 19th century.

It acquired the name Cable & Wireless in 1934, became part of the Post Office in 1947 and was eventually privatised and re-badged Mercury Communications in the early 1980s to provide competition for British Telecom.

In the late 1990s it was part of the fast consolidating cable communications industry, though it sold its domestic network of fibre optic cable to NTL (now Virgin Media) in 2000. rate history.

It off-loaded its mobile phone business in 1999 to T-Mobile and stakes in the Hong Kong phone network and Optus in Australia have also gone.

Today it comprises the two businesses mentioned earlier: CWI, which runs regional telecoms companies in the Caribbean, Panama, Macau, Monaco, the Channel Islands, the Maldives and the Seychelles.

And the Worldwide operation, which specialises in business telephony. The Worldwide moniker is a misnomer as the assets are mainly British. According to analysts at Citi, Worldwide accounts for 55pc of the value of the combined business.

Whether the share split recognises this depends on the market’s appetite for risk. CWI is the less risky cash generative bit, which should appeal to income investors. Worldwide offers a growth story.

There are two reasons why I’m picking C&W to kick off the Daily Mail portfolio. Firstly, I think the two newly demerged companies will lift off once the global economy really hits the recovery trail.

And secondly, I believe the split will excite bid interest. Private equity and ambitious regional operators will no doubt have run the slide-rule along CWI.

Worldwide has strategic assets such as submarine cables, while the business’s blue- chip corporate customer base may elicit interest from mobile phone companies looking for new avenues of growth.

Research from ING recently revealed that 65pc of demergers result in a bid for one of the constituent parts. At the very least they tend to focus investors’ minds on the true value of the individual businesses.

This is exactly what has happened in the run up to the split. There have been a succession of broker notes that have revised up the valuation of the business to 170p-205p from around 150p before the break-up was mooted. The current price is 142.4p.

The valuation is attractive at just 10 times earnings, which comes with a very generous 7pc dividend yield.

Fears have been expressed over the sustainability of that very meaty pay-out after the company is broken up.

However, most brokers remain confident about the future dividend distribution.

Source: Daily Mail, 29th January 2010

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