Directionless At Cable & Wireless?

Duncan Lewis was in fine fettle on Sept. 11. That day, the chief executive of Mercury Communications Ltd., Cable & Wireless PLC's British phone operator, attacked regulators for not doing their job. The next day, Lewis was gone. Buried deep in a C&W press release announcing top management and board changes was the news that Lewis had left the company for "personal reasons."

Lewis isn't talking, but insiders say he resigned after a nasty dispute over C&W's strategic direction. His abrupt exit makes him the fourth Mercury chief to leave in six years. The departure of Lewis, who was highly regarded by C&W shareholders, has deepened investor concern that the company has lost its way. As Tony Dench, senior telecommunications analyst at Yankee Group Europe, puts it: "What is it they are really going after?"

SYNERGY SEARCH. Top executives declined to comment, but a spokesman did say that C&W stands by its strategy of forming a global telecommunications federation. The company, with about $8 billion in sales, has major stakes in telecom operators in more than 50 countries. The biggest holdings are in Mercury, Hong Kong Telecommunications, and a clutch of telecom companies in the Caribbean, including Jamaica. C&W chief James H. Ross has pledged to add synergy by swiftly sharing expertise between the groups and developing regional powerhouses in Europe, East Asia, the Caribbean, and the Middle East, where C&W holds 10% of the Israeli telephone company.

Sounds good. And pretax profits have generously exceeded $1 billion in recent years, so the company is far from being a basket case. Yet investors question if the federation idea actually makes the whole greater than the sum of its parts, especially such far-flung parts. Says one former top manager: "This federation is more like an investment portfolio, with lots of small stakes. It's difficult to pull them together." Meanwhile, giants British Telecommunications and MCI Communications Corp. have a clearly focused, well-marketed pact to deliver long-distance service, and AT&T is achieving something similar with its WorldPartners Assn.

If C&W doesn't make the synergy strategy work, its critics argue, all it has is a group of companies that rely on Hong Kong Telecom to generate two-thirds of profits. Hong Kong Telecom, long a money machine, has now lost its local service monopoly and is facing competitors in international calls. And while many believe that C&W still has a strong China card to play, there has been little visible progress in signing up deals to develop networks on the mainland.

Across the world, meanwhile, price-cutting and new players in the wide-open British market have hurt Mercury, whose woes produced a 22% drop in C&W's pretax income last year, to $1.3 billion. Lewis had been restructuring furiously to find a solidly profitable core. "He was doing a truly fine job refocusing the strategy," says a dismayed Bob Kearney, an executive with BCE, the Canadian telecom group that holds 20% of Mercury.

SAGGING STOCK. Kearney stresses that while the Mercury stake has "performed well" in the past, BCE is constantly looking at its investment and asking "Is this company performing the way we want it to perform?" Yet for now, Mercury is supposed to be on the mend, and C&W's pretax profits, by some estimates, should rebound to $1.9 billion in this fiscal year. But the market has registered its concern over the strategic issues by bidding down C&W stock, which has lately lagged the London bourse (chart). C&W's current market capitalization is $14 billion, which sounds sizable. But after subtracting the value of C&W's 57.5% stake in separately traded Hong Kong Telecom, the remaining businesses are only valued at $3.4 billion. Most analysts think they are worth twice that.

C&W seems determined to follow its federation strategy. The company recently paid $1.3 billion for a 45% share in a joint venture with German energy company Veba. The goal is to start a German, and later Europewide, telecommunications operation. Insiders say talk of merging Mercury into this venture was at the root of Lewis' dissatisfaction. He thought the Veba stake too costly and the European strategy too risky.

Now Lewis is gone, leaving behind a company that still boasts many strengths. But the uneasy feeling that this medium-size player faces a tough slog against the telecom giants isn't fading away. C&W has to send a clear signal of how it plans to put these fears to rest, and fast.

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