Corporate mercy killing required

Posted by Neil Hume on Jun 28 08:45.

If Cable & Wireless Worldwide was a domestic pet instead of a fully-listed company, surely it would have been put out of its misery by now.

This really is a wretched company.

Profit warnings, strategic flip flops, board room bust-ups, cash flow problems, morally reprehensible bonus payments and now this:

From C&WW on Tuesday morning.

Cable & Wireless Worldwide plc today confirms that its financial performance is in line with management expectations for the first 10 weeks of the 2011/12 year.

However, sales orders over this period, which contribute to margin growth later in the year, have been slower than expected. This recent trend combined with a lower than projected sales pipeline across our business indicates that our gross margin out turn is now expected to be somewhat below current market expectations.

This, coupled with an intention to accelerate the investments necessary to deliver growth in the hosting and cloud arena, is expected to lead to EBITDA outcome for 2011/12 some 5 to 10 percent below current market expectations with a commensurate impact on trading cash flow.

As a consequence of the reduced cash flow forecast, the Board has again reviewed the likely timetable to achieve dividend cover and has accepted that it is appropriate to reduce the intended dividend distribution for 2011/12 by half to 2.25 pence per share.

But that’s not all.

The CEO, Jim Marsh, has fallen on his sword, and the architect of the CWW spin-off is back:

John Pluthero comments: “Clearly it has been a very difficult 12 months and it is now important that we take the necessary steps to ensure the future growth of our business. I’ll be looking to take a more radical approach to building on our hosting, cloud and data services business whilst becoming more competitive and efficient in the mature product areas. It has been easy to lose sight of what this business could be; it is my intention to reassert and realise that future.”

John Barton [chairman] says: “John Pluthero was the architect behind the successful turnaround of Cable&Wireless prior to demerger and knows the business and sector well. The Board has given John a full mandate to accelerate growth and maximise profitability.”

What? The successful turnaround of Cable & Wireless prior to demerger?! That’s somewhat generous, although not as generous as the bonus package hard man Mr Pluthero was able to negotiate.

And how exactly does what’s outlined above – hosting, cloud and data services business — differ from what’s come before?

It doesn’t, says Mark James at Liberum, who reckons the dividend should have been cut by a two thirds such is C&WW’s inability to generate cash:

We remain of the view that underlying cash generation at CWW is insufficient to justify its £1.4bn market cap. CWW delivered just £11m of FCF last year and our FY12 estimate is £50m. Telcos routinely trade at 10% FCF yields yet CWW trades at c.4%. Cutting the dividend in half is sensible, though we would caution that on our numbers, an annual bill of £59m remains uncovered by underlying cash generation: we believe it should have been cut by 2/3 rather than by 50%. We would also caution against any expectations that a new strategy, under the incoming CWO, would differ significantly, or have much more success, than the old one. CWW’s poor cash conversion is, in our view, the result of inadequate scale: something hard to change in the face of declining revenue.

Yep, very hard to change.

The best that can be hoped for here is some sort of corporate mercy killing. But is there anyone who wants to buy C&WW?

And what about the corporate governance angle here? What do shareholders think about the chairman becoming the CEO of his pet project?

At pixel time, shares in CWW were down 7.25 pence at 44.9p.

Cable & Wireless shareholder list.
(Click to enlarge)

Update: 09.23am (BST)
Jerry Dellis at Jefferies weighs in with his thoughts:

• Credibility issue. John Puthero expressed the view that CWW’s core 800 clients remain comfortable that the business is able to invest in product for the long term. However, we remain concerned that the cumulative effect of the last year’s news flow could dissuade new customers.

• Radical endgame. Against this backdrop of credibility concerns and a tough operating environment, we believe that some investors may be loath to accept the risks of a long-term turnaround. We believe that CWW could fit well into the Enterprise divisions of certain telco incumbents.

Related link:
The Cable & Wireless boardroom bust-up – FT Alphaville

This entry was posted by Neil Hume on Tuesday, June 28th, 2011 at 8:45 and is filed under Capital markets, People. Tagged with , , , .

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