C&W sets scene but is reticent on detail

Cable andand Wirelessfinally announced much-awaited plans for a demerger of its UK and international telecoms businesses but then stayed strangely coy on the detail of the blueprint.

Further details are promised this month but some analysts express frustration at the lack of information and say it appears to be an effort to test stock market reaction to the concept of a demerger.

The prospect of separate listings for C&W's UK and international businesses is one that could revive its flagging share price and in turn boost the size of cash pay-outs to management under its private equity- style remuneration scheme.

C&W's shares have under-performed the FTSE 100 index by 23 per cent this year and Will Draper, analyst at Execution, says of the demerger statement: "The manner of announcement may be seen as a little cynical: management will have the opportunity to assess market reaction before making a further announcement."

The November-end timetable for the demerger blueprint would fit in with the aim of splitting the group in the first half of next year.

Tim Pennington, finance director, says the rationale for the demerger is rooted in the UK and international businesses having little or nothing in common.

The UK business serves the needs of companies rather than individuals under a turnround strategy led by John Pluthero, its abrasive chairman.

By contrast, the international business, which has units scattered across many parts of the former British empire, does supply individuals with phone and broadband services, as well as companies.

"By separating the two businesses we feel we can free up both businesses to execute their strategies without having to look over their shoulder about how the other is going to take it," says Mr Pennington.

C&W is expected to pursue a classic demerger, where investors swap their existing shares for stock in two new listed companies.

Some analysts say C&W suffers from a "conglomerate discount" - pointing to the notion that two shares in the new companies should be worth more than one in the existing group. The UK business would likely offer investors a growth opportunity while the international arm could pay strong dividends.

More importantly, analysts say a demerger, given the different profiles of the businesses, could lead to bids for one or both.

The UK business could be attractive to other groups serving the telecoms needs of companies such as AT&T and Verizon Communications of the US and France Telecom (Paris: FR0000133308 - news) .

The international business could be divided up. For example, Denis O'Brien's Digicel might be interested in C&W's Caribbean operations, given that they already compete there. Telefónica and America Movil may be tempted by C&W's Panama unit, where they also have operations.

C&W's demerger plans are already well advanced, given the company came close to unveiling them in November last year.

But the board then decided to put the process on hold, partly because of the difficulty of arranging debt facilities for the UK business at the height of the credit crunch.

The UK business has only just started generating cash but the availability of credit has improved, so C&W is now ready to press ahead with the demerger.

One key issue to be resolved ahead of demerger is C&W's main UK defined benefit pension scheme. It had a deficit of £305m at September 30 under accounting rules, compared to £32m at March 31, because lower interest rates have increased the size of the scheme's liabilities.

Morgan Stanley (NYSE: MS - news) analysts question whether the scheme's trustees would support a demerger now, given the UK arm only generated £19m of trading cash flow in the first half.

Mr Pennington, meanwhile, insists that the demerger strategy is not influenced by the company's long-term incentive plan for management.

The size of the plan's pay-out is based on total shareholder return, and Richard Lapthorne, C&W's chairman, regards the scheme as a way of aligning the interests of management with investors.

When he conceived the scheme in 2006, it was supposed to fire the turnround of the UK business, which had been in long-term decline.

This year, the scheme paid out £32m to C&W's managers, including £8m for Mr Pluthero, based on a 44 per cent return to shareholders between March 2006 and March 2009.

The scheme is due to make a final pay-out to managers in March 2011, but the demerger could trigger an earlier disbursement - depending on share price performance.

Mr Draper estimates that if C&W's share price reaches 150p by the time of the demerger - from 138.9p Thursday night - then C&W's managers could share £68m.

But if the shares hit 200p then the managers could share in a £162m pay-out, with £30m going to Mr Pluthero.

While the company is staying silent about the demerger plans, Mr Pluthero is at pains to reassure investors that he is not planning to quit C&W shortly after the split.

"The fun is only just beginning for us," he says.