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http://www.guardian.co.uk/business/story/0,3604,856306,00.html C&W faces a £1bn shares hit

Telecoms group pays price for downgrade to ‘junk’ rating

Terry Macalister Monday December 9, 2002 The Guardian

Up to £1bn could be wiped off Cable & Wireless shares this morning – 50% of their value – as the City punishes the telecoms group for having its ADVERTISEMENT debt downgraded to “junk” status.

The massive sell-off threatens to further shred the battered reputation of chief executive Graham Wallace, who many believe will stand down as soon as a new chairman has been found.

Mr Wallace will try to stave off financial crisis at C&W by asking Deutsche Telekom to waive a £1.5bn indemnity that was triggered by Friday’s long-term debt rating change by Moody’s Investors Services.

The British telecoms group is likely to face further misery in the next couple of days as a massive shares sell-off would bundle it out of the FTSE 100 index of leading companies.

Talks with its banks were continuing through the weekend and there could be more credit downgrades from Standard & Poor’s and Fitch, which has C&W under review.

The company announced interim pre-tax losses of £4.4bn after writing down the value of assets by £3.5bn, and its stock has slumped to 83.5p, valuing the firm at just under £2bn.

Industry experts said C&W would see its shares heavily sold off today because there had been four profit warnings within 18 months which had left investors worried about more skeletons in the cupboard.

“I don’t think they are there yet but I think some will say that the company is effectively bankrupt, and certainly the shares will be hit extremely hard because C&W has repeatedly been valued on a worst case scenario. Management credibility is lost and I don’t think Wallace will survive the new chairman,” said one telecoms analyst.

C&W would not comment on the likely unseating of the chief executive but hotly denied there was any question of the company’s bankrupcy.

“Absolutely not,” said a C&W spokesman, pointing out the company has £3.8bn of gross cash and £2.2bn of net cash. “The maths does not add up to come to that conclusion.

“We are still left with plenty of headroom,” he added. The company had sufficient financial flexibility to restructure the global international telecoms arm – where much of the trouble has been found – and meet its debt obligations, he said.

The Moody’s downgrade affects an agreement in 1999 whereby C&W promised to indemnify Deutsche against any potential tax liabilities arising out of C&W’s sale to the German group of its stake in a mobile phone firm.

C&W sold its 50% holding in One2One for £3.45bn but, fearful of future tax commitments that may accrue, Deutsche made C&W commit itself to stump up £1.5bn if C&W’s credit ratings ever fell into “junk” territory.

The British group said it had taken advice from both fiscal and legal experts on the matter and still believed that no tax liabilities would accrue.

Asked whether it would be putting pressure on Deutsche not to insist on an indemnity that would force the UK firm to ring-fence £1.5bn of much-needed cash, a CW spokesman said last night: “I’m sure we will be looking to mitigate the situation in any way possible.”

C&W has been hunting for a new chairman since David Nash, the chairman-designate, said he would not be taking up the post.

The company has announced plans to cut 3,500 jobs at its struggling global telecoms arm, which must become cash-positive by March 2004 or leave the group facing further debt rating downgrades.

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