Can Graham Wallace Get Cable & Wireless Untangled?

The new CEO may spin off pieces to pay for global ambitions

Graham Wallace became chief executive of Cable & Wireless PLC just two months ago, but he knows what's right and wrong with the 125-year-old British company. On the plus side, it's smack in the middle of the world's hottest industries, with stakes in phone, cable, wireless, and Internet operators in more than 80 countries. The problem is that C&W seems unable to exploit those strengths, and that's turning off investors. By most analysts' estimates, C&W's stock is trading at more than a 25% discount to its breakup value.

Wallace is already flagging major changes ahead. He wants to expand C&W's presence in the U.S., Europe, and Asia, where demand for business applications such as high-speed voice and data transmission is expected to surge. But as C&W's former finance director, he is acutely aware that the company's global aspirations outweigh its financial resources. That's likely to lead to some major surgery by the unassuming 51-year-old Briton. C&W is in discussions with rival British cable operator Telewest Communications PLC about merging parts of their businesses and is also considering the sale or spin-off of its 50% stake in British cellular company One 2 One.

THE EASY PART. Critics say identifying what the company needs to do was easy. "C&W has the potential to be a leading global telecom carrier along the lines of MCI WorldCom," says Paul Marsch, an executive director at Morgan Stanley Dean Witter in London. "But to get there, C&W must better exploit its global infrastructure, sharpen the focus of its international assets, and dispose of some of [its] excess baggage."

Wallace also faces inevitable comparisons to his more colorful predecessor Dick Brown. Brown had the reputation for being a deal junkie, while Wallace is seen as more focused on running the business, says a source who has worked with both. "I think Wallace will be more brutal," adds a Deutsche Bank analyst in London. "He's less sensitive than Brown about disposing of good companies that don't fit into the overall strategy."

Still, Wallace owes a debt to Brown. In his 27-month tenure, Brown cut 21 deals. They helped make C&W the largest carrier of Internet traffic outside the U.S. and the second in the U.S. after MCI WorldCom, says James McCafferty, head of telecom research at SG Securities. Last July's $1.75 billion acquisition of MCI's Internet backbone business should enhance C&W's stakes in the U.S. Net market, which is forecast to grow more than 100% annually, he adds. In November, C&W announced plans to build a fully integrated voice, data, and Internet network linking more than 40 European cities. Brown also helped build up C&W's stakes in its three listed subsidiaries, Hong Kong Telecom, C&W Communications, and Optus Communications (table).

The proposed transactions involving both Telewest and One 2 One are in line with Wallace's expressed desire to refocus on the higher-margin corporate market for global voice and data services. One way to do that would be to spin off C&W Communications' residential cable interests--possibly with the consumer-oriented One 2 One--and concentrate on the international businesses. Wallace's goal is to make C&W a global carrier that sells its services to other carriers and multinationals.

It's an ambitious plan. But Wallace's track record indicates he has what it takes. During his 10-year stint at British cable giant Granada Group PLC, Wallace represented British Satellite Broadcasting in its difficult merger with pay-TV operator BSkyB. Later, as head of C&W Communications, he turned around its three merged cable ventures.

Although Wallace has had no experience in global telecoms, he knows how to seal a deal. While interviewing for CEO at C&W, he was asked by its board to explain why he should get the job instead of someone more experienced. Wallace replied that most experience is outdated, gained back when telecom was run as a local monopoly. His background is in running competitive companies. Now it's up to Wallace to prove it.

Before it's here, it's on the Bloomberg Terminal.