C&W guidance cut overshadows demerger plans

LONDON (Reuters) - Cable & Wireless (C&W) cut full-year earnings guidance on Thursday due to a poor performance in the Caribbean, overshadowing a fresh bid to demerge the British cable group and hammering its shares.

C&W said it cut the earnings guidance for the International division (CWI) because falling tourist numbers in the Caribbean had resulted in less overall demand for its services in the region.

It also reported first half results which missed revenue targets but beat earnings forecasts due to cost cuts and improved margins.

"While the market has seemingly been keen for a demerger, the uncertainty surrounding the timing and the performance of one of the two components could temper enthusiasm in the short term," RBS (LSE: RBS.L - news) analyst Chris Alliott said in a note.

The group said it would give further details on the demerger, such as timing, by the end of this month.

Other analysts were unimpressed with the update, with several disappointed at the cut in earnings guidance and others noting that the demerger comments did not add much.

The group said it would now relaunch the demerging process, put on hold a year ago due to poor market conditions. It will split into Worldwide (CWW), which offers business communications across Europe, Asia and the United States, and International, which provides fixed-line and mobile services in the Caribbean, Macau, Panama and others.

"As a result of the emerging signs of more settled conditions in financial markets, we are now moving forward to list the two businesses as independent, publicly-quoted companies," Chairman Richard Lapthorne said.

Analysts had said a demerger was dependent on Worldwide proving that it could generate sustainable positive cashflow, a critical condition given the pension fund associated with the operation, which has thus far been supported by CWI cash flows.

"We question whether the pension trustees can agree a demerger given CWW cash generation in H1 was only 19 million pounds," Morgan Stanley (NYSE: MS - news) said.

Expectations were low going into the H1 results, due to the economic downturn which impacts tourism numbers, increasing competition in Panama that could hit margins, and traditionally poor cash generation at the CWW unit.

Looking further ahead, analysts at Deutsche Bank (Xetra: 514000 - news) said the demerger could be a catalyst for the shares and said there could be a number of interested bidders for Worldwide.

Ahead of the results, shares in the group had risen roughly 4 percent since lows in March, compared to the FTSE 100 which has risen more than 30 percent in the same period.

To add to the lacklustre share performance, the decision to cut the International guidance for earnings before interest, tax, depreciation and amortisation (EBITDA) sent the shares down almost 8 percent on Thursday.

The drop in tourism numbers resulted in lower revenue per user, less demand from business customers and less demand amongst construction workers.

"We are resetting our full year CWI EBITDA guidance in the range of $880 million (530 million pounds) to $900 million, a net reduction of $35 million - $55 million," the group said.

Earnings for the group were revised down to a range of 989 million pounds to 1 billion pounds, from an earlier target of 1.03 billion pounds.

For the first half, C&W posted group EBITDA of 463 million pounds, up 30 percent and ahead of a Reuters poll expecting 454 million pounds, while revenues missed forecasts at 1.86 billion pounds, compared to a forecast of 1.92 billion pounds.

(Reporting by Kate Holton; Editing by Jon Loades-Carter and Karen Foster)