Description

Cable & Wireless (CWP) is one of the three largest global telecom
operators. It has reorganized itself into a regional and global division
(which includes the global network and concentrates on internet usage and
data transimission by businesses). Its share price is depressed partly
because telecom operators are not well perceived by the market, partly
because it disappointed when it most recently reported business growth
and partly because there appear to be doubts concerning its use of its
cash (which I describe below).

CWP shares are traded in London and ADS are traded on the NYSE (one ADS =
three London shares). I will cite most numbers in pounds and will use $1.50
/pound when I mention dollars.

It has 6 billion pounds in cash and a market capitalization of 8.7 billion
pounds. According to the Financial Times, CWP is in the process of selling
its Caribbean operations for 2.5 billion pounds, which puts a valuation of
around zero on the rest of the business. The rest of the business would
include odds and ends from the regional division as well as the global
operations division. Last year the global division generated around 340
million pounds in EBIDTA. This translates into around 90 pence/ ADS
(assuming 1 billion shares outstanding), or $1.35/ADS. Last year, CWP
generated EBIDTA of 1 pound/share, or around $4.50/ADS (for a ADS price of
$15). Even assuming the same depressed evaluation, the $1.35 cash/ADS
ought to translate into around $5/ADS additional value, instead of the
zero evaluation currently given. That translates into a current value of
$20/ADS, neglecting any value for the global division as a business
(including its network). The $1.35/ADS cash flow is not expected to
decrease, although its growth rate might disappoint.

It is estimated by people like Bill Miller of Legg Mason that the
telecommunications industry ought to right itself within the next three
years. There will be consolidations and bankruptcies, but today's excess
capacity will, one day (even if not within 3 years), be too little. The
growth of internet usage and data transmission by the businesses (where
CWP's operations are concentrated) will have to grow at very high levels
one day in the future. When this happens, the conservative estimates
(regarding value of the cash flow, the amount of cash flow and value of the
business) given above will be obsolete.

CWP's cash hoard is very attractive to other, cash short, telecom
companies. Were there to be a takeover bid, it would have to account for
the $20/ADS estimate cited above (which is conservative) as well as the
value of global as a business (including the value of the network). The
Financial Times estimates a premium of 40 to 50% above the current price.

Finally, CWP has paid a dividend since the 1980's, when it became private. The current rate is between 7 and 8%.

It is possible that CWP will again disappoint when it reports earnings
and it is possible for the share price to be below cash. Nevertheless,
current valuations seem compelling.

Catalyst

1. CWP has cash of 6 billion pounds and market cap of 8.7 billion pounds.
It will soon sell its Caribbean division for 2.5 billion pounds, putting
a valuation on what remains of zero.
2. The remaining portion, basically the global operations division,
generated $1.35/ADS last year. This cash flow translates into at least
$5/ADS, giving a current valuation including the cash hoard of at least
$20/ADS.
3. The cash hoard would be very attractive to cash hungry telecom
operators. In the event of a takeover bid, the conservative $20/ADS value
would have to be increased by the value of the global division as a
business (including the value of the network).
4. When the telecom industry (and the global economy) recovers, the areas
of internet usage and business data transmission should exhibit rapid
growth -- these are the areas in which CWP's global division has
concentrated its efforts.