Crisis as C&W loses €1.3bn in market fall

By the close of trading C&W’s shares – which once reached more than £15 (€23.50) – were down 43% at 47.75p and the group now faces the threat of being relegated from the FTSE 100 Index in this week’s quarterly reshuffle.

Analysts say the group’s stock needs to trade at around 53p to stay in the prestigious index.

The slide came after the group announced late on Friday that a downgrade in its debts triggered a clause in a complex agreement dating back three years.

The clause related to the group’s sale of its 50% stake in UK mobile operator One2One to Deutsche Telekom for £3.45bn (€5.4bn).

Under the deal C&W agreed with the German group that, should its credit rating fall below investment grade, it would set aside £1.5bn (€2.35bn) to cover potential tax liabilities arising in future years.

On Friday afternoon, the group’s debts were downgraded by credit rating agency Moody’s on Friday to junk status and later that day C&W announced the move had triggered the clause.

C&W now has to either procure a bank guarantee for the amount or place the sum into escrow – meaning it would lodge the sum in cash in a special bank account.

The group is now in crucial talks with banks and with Deutsche Telekom.

A spokesman for C&W said: “Talks with banks are continuing.”

He added: “We have started talks with Deutsche Telekom. The talks are about the timing and the process for starting up the arrangement and if in the course of that we can mitigate the situation then obviously we would want to do that.”

Barry Murphy, telecoms analyst at Bear Stearns, said C&W’s likelihood of securing a guarantee was dependent on how real the banks viewed the risk of having to pay out.

“I think it depends on how likely the banks view that this liability is real. If they do believe it to be a real risk, the likelihood could well be slim.”

Analysts were also concerned that C&W had not flagged up the risk earlier.

“The concern is the company never fronted up this particular affair previously. They were downgraded last month and the possibility of getting downgraded to junk status was real,” Mr Murphy said.

Analysts at Dresdner Kleinwort Wasserstein were blunt in their analysis.

“Investing in C&W is like buying what appears to be undervalued real estate at the foot of an active volcano,” a research note from the company said.

The £1.5bn (€2.35bn) potential liability amounts to a large chunk of the group’s £2.2bn (€3.4bn) cash holdings, left over from a string of sales between 1999 and 2000.

C&W stressed on Friday it had “sufficient financial flexibility” to restructure its Global international telecoms arm and meet its debt obligations.

But the market was shocked by the announcement and analysts said it increased the pressure on the group’s chief executive Graham Wallace to leave the group.

Mr Wallace joined the firm in 1998 but has presided over four profits warnings in the last 18 months.

Commenting on speculation regarding Mr Wallace’s future at the firm, the C&W spokesman said: “Graham Wallace is the chief executive of C&W.”

He would not comment further.

Barry Murphy, telecoms analyst at Bear Stearns, said that the likelihood of Graham Wallace leaving the business was now “quite high“.

The bad news comes a month after C&W announced costly plans to overhaul its Global division, which provides Internet and data services to corporate customers and has been hit by pricing pressures in the last 18 months.

The move will see the loss of 3,500 jobs as C&W abandons domestic business markets in the US and mainland Europe to focus on multinational customers and will cost £800 million to implement over the next 12 months.

At the time, C&W also reported half-year pre-tax losses of £4.4bn (€6.9bn) after writing down the value of assets by £3.5bn (€5.5bn).