16th Aug 2005 06:00
CABLE AND WIRELESS PLC ANNOUNCES THE ACQUISITION OF ENERGIS Cable and Wireless plc ("Cable & Wireless") announces today, 16 August 2005,that it has reached agreement to acquire the entire issued share capital ofChelys Limited ("Energis"). Energis will be acquired on a debt and cash freebasis, save for Energis' finance lease obligations of approximately ‚£37million, for an initial cash consideration of ‚£594 million. On completion Cable& Wireless will inject approximately ‚£35 million in cash, which is expected tobe recovered within the first year after completion, to meet Energis'short-term working capital requirements. Completion of the acquisition issubject to Office of Fair Trading ("OFT") approval.In the third year following completion, Cable & Wireless has agreed to pay acontingent consideration of between zero and ‚£80 million, payable in cash orshares at Cable & Wireless' option, dependent on the level of Cable & Wireless'share price.The acquisition is expected to be accretive to underlying earnings per share inthe first full financial year after completion and beyond. In addition, thetransaction is expected to deliver an acceptable return on invested capital inthe second full financial year after completion.Announcing the agreement Cable & Wireless Group CEO, Francesco Caio, said: "Theacquisition of Energis is a further step in the development of Cable & Wirelessin the UK and will accelerate the strategic transformation that we haveundertaken in the last 15 months. The integration of the two businesses willdeliver good cost and capex synergies and add blue chip customers to ourexisting base in the large corporate segment. Importantly, it will also createa stronger player with the scale needed to succeed in the increasinglycompetitive telecoms industry. The timing of this acquisition allows us toexploit the rapid growth in demand for IP-based services and the opportunitiespresented by the creation of a regulatory framework designed to facilitateinfrastructure-based competition. For these reasons, this acquisition makesboth financial and strategic sense."We are realistic about the short-term prospects of the combined business. Thetransaction will not alter the fundamental trends affecting legacy services ofcontinued pricing pressure and a high level of competition. Additional scalewill allow us to further reduce unit costs to mitigate this pricing pressure inlegacy services and, in the mid-term, it will drive better returns on ourstrategic investment programmes. Through our investments in broadband and localloop unbundling and our planned rollout of a next generation network, we willaddress the growing IP demands of our combined customer base and re-positionCable & Wireless as the alternative to the UK incumbent."The purchase price is justified by the cost and capex synergies that areuniquely available from combining Energis and Cable & Wireless in the UK. Thesynergy value is based on our preliminary assessment and will be furtherdeveloped as the UK executive team, led by John Pluthero, completes theintegration plan."With our investments in NGN and LLU underway, a better regulatory environmentand the growing demand of our customers for IP-based services, the acquisitionof Energis accelerates our transformation and enhances our returns by addingvolume to our new infrastructure."Cost and capex synergies - initial viewThe combination of Cable & Wireless UK and Energis is expected to enable totalannual operating cost and capex synergies of approximately ‚£55 million in 2006/7 rising to ‚£80 million in 2007/8. EBITDA synergies of the combined businessesare expected to amount to ‚£40 million in 2006/7 and ‚£55 million in 2007/8.Combining the two businesses is expected to reduce headcount by around 700 byMarch 2008.Capital expenditure synergies of combining the businesses are expected toamount to ‚£15 million in 2006/7 and ‚£25 million in 2007/8. These amounts havebeen determined on the basis that the two legacy networks will not beintegrated but that the single NGN platform, being developed by Cable &Wireless, will serve the customer base of the combined business. The fullpotential of synergy benefits will be realised with completion of NGN in 2008/9.The one-off costs to realise the synergy benefits are expected to be between ‚£75 million and ‚£100 million over three years, of which at least two thirds areexpected to be treated as exceptional (on a UK GAAP basis).ConsiderationThe consideration comprises an initial cash payment of ‚£594 million from Cable& Wireless' existing cash resources to acquire the entire issued share capitalof Energis and to eliminate its existing bank debt. Energis' finance leases ofapproximately ‚£37 million will remain obligations of Energis following itsacquisition by Cable & Wireless. In addition, ‚£126 million will be distributedby Energis to its debtholders from its cash resources. Because the timing ofthe acquisition is expected to coincide with a peak in Energis' working capitalrequirements Cable & Wireless will inject the amount of approximately ‚£35million, which is expected to be recovered within the first year followingcompletion. The acquisition will be funded through Cable & Wireless' existingcash balance.The contingent consideration of between zero and a maximum of ‚£80 million istied to Cable & Wireless' share price. Payments will be based on a ratio of ‚£1.25 million for every one penny rise by which the maximum three month volumeweighted average Cable & Wireless share price in the third year followingcompletion exceeds the reference price of 135 pence (based on Cable & Wireless'volume weighted average share price for the three months prior to Cable &Wireless' AGM on 22 July, 2005).The acquisition is expected to complete in Autumn 2005, subject to OFTclearance and the potential requirement to implement a scheme of arrangement toacquire the most junior tranche of Energis' bank debt.OutlookFurther to the guidance provided to date on Cable & Wireless Group outlook for2005/6, Cable & Wireless expects the performance of the Group in the secondhalf of this financial year to be impacted by the transaction in the followingways: * Elimination of inter-company trading between Cable & Wireless and Energis of approximately ‚£10 million (with no associated margin impact); * A reduction in combined UK EBITDA of approximately ‚£5 million, due to the potential loss of certain dual sourcing reseller customers, likely retail customer terminations, initial disruption on order intake due to short-term uncertainty during integration together with a planned review of unprofitable commercial contracts following completion; * Realisation of estimated capital expenditure synergies of ‚£15 million; * Integration charges of ‚£40 million, of which ‚£27 million is expected to be exceptional (on a UK GAAP basis); and * A reduction in depreciation of Energis' fixed assets of approximately ‚£5 million to ‚£10 million, subject to review following completion. Additionally, we expect there to be a 30 percent decline annually in Energis'narrowband ISP revenue.Although Cable & Wireless continues to implement the cost reduction programmesannounced to date, the integration of Energis is expected to delay some of thebenefits of these initiatives. For this reason, UK and Corporate savings in thesecond half of the year are expected to be reduced by ‚£15 million.As at 31 March 2005, Cable & Wireless had completed ‚£75 million of its ‚£250million share repurchase programme, outlined in November 2004. This programmewas put in place to facilitate management of the Group balance sheet (and as aresult of the better than anticipated outcome of a number of divestments).Following this acquisition the programme will remain in place but is unlikelyto be used in the short term.Organisational changesOn completion, John Pluthero will be appointed Executive Director UK Businessand will join the Board of Cable & Wireless. He will be responsible for thecombined UK operations of Cable & Wireless and Energis, excluding BulldogCommunications.John Pluthero, Chief Executive of Energis, said "The fundamental changes in theUK telecoms market cannot be dealt with by yesterday's model. This combinationdelivers what customers require today - a company with more capability, greateraccess and larger scale. Those are the prerequisites to compete in the UKmarket and that is the business we are setting out to create today."Cable & Wireless Group Chairman, Richard Lapthorne, concluded: "Thisacquisition is all about accelerating the creation of a sustainable competitiveUK business for Cable & Wireless in the medium term and we strongly believethat it will achieve that aim. Nevertheless we have no illusions about thechallenge facing us as we manage the transition period, when the pricing oflegacy products remains weak and yet the tangible benefits of our shift to thenext generation network have not yet kicked in."Further details on financials(All financials shown are before exceptional items and on a UK GAAP basis.) Cable & Wireless UK Overview Year to 31 March (‚£ 2003 2004 2005 million) Retail 960 898 869 Carrier services 724 763 733 Total revenue 1,684 1,661 1,602 EBITDA 116 101 150 EBITDA margin % 7% 6% 9% Operating profit -297 33 90 Capex -341 -101 -138 Free cash flow* -225 - 12 Energis Overview Year to 31 March (‚£ 2003 2004 2005 million) Retail 280 303 340 Carrier services 168 187 195 ISP 322 255 185 Total revenue 770 745 720 EBITDA 103 125 116 EBITDA margin % 13% 17% 16% Operating profit -28 10 1 Capex -47 -67 -94 Free cash flow* 56 58 22 Gross assets 670 * Free cash flow equals operating profit plus depreciation less cash capitalexpenditureAbout John Pluthero:On completion of the acquisition John Pluthero will be appointed ExecutiveDirector UK Business and will join the Board of Cable & Wireless. His servicecontract will be terminable on one year's notice by either party. John Plutherowill receive a base salary of ‚£500,000 per annum, inclusive of any fees towhich he may be entitled as a director of any Cable & Wireless Group company. He will be entitled to participate in various Group employee incentive plans,subject to the prevailing terms and conditions of the relevant plans, and Cable& Wireless has agreed, subject to certain conditions and limits, to matchshares subscribed for, to grant performance shares and to grant options basedon performance. Prior to joining Energis as CEO in September 2002 he was thefounder, CEO and Director of Freeserve plc, the UK's largest internet serviceprovider and led it to its July 1999 flotation on the London Stock Exchange andNASDAQ. Prior to this, he had held various strategy and operations positionswithin the Dixons Group. There are no further details required to be disclosedpursuant to paragraph 9.6.13 of the Listing Rules of the UK Listing Authorityin relation to the proposed appointment of John Pluthero.For further informationInvestor RelationsLouise Breen Director, Investor Relations 020 7315 4460Virginia Porter VP, Investor Relations 020 7315 4066Craig Thornton Manager, Investor Relations 020 7315 6225MediaLesley Smith Group Director Corporate & Public Affairs 020 7315 4064Steve Double Group Head of Media Communications 01344 726946There will be a presentation today to analysts and institutions at 10.00am atJP Morgan Cazenove, 20 Moorgate, London, EC2.Cable & Wireless announcements are available on its website: www.cw.com. Theslide pack and presentation to analysts and institutions will also be availablelater today. An interview with Francesco Caio, CEO in video/audio and text willbe available from 07.00am on 16 August 2005 on http://www.cw.com and http://www.cantos.com.JP Morgan Cazenove and Gleacher Shacklock are acting as financial advisers toCable & Wireless.Hoare Govett and JP Morgan Cazenove are acting as brokers to Cable & Wireless.Forward-looking statementsIt is possible that this announcement could or may contain forward-lookingstatements that are based on current expectations or beliefs, as well asassumptions about future events. These forward-looking statements can beidentified by the fact that they do not relate only to historical or currentfacts. Forward-looking statements often use words such as anticipate, target,expect, estimate, intend, plan, goal, believe, will, may, should, would, couldor other words of similar meaning. Undue reliance should not beplaced on any such statements because, by their very nature, they are subjectto known and unknown risks and uncertainties and can be affected by otherfactors that could cause actual results, and Cable & Wireless' plans andobjectives, to differ materially from those expressed or implied in theforward-looking statements.There are several factors which could cause actual results to differ materiallyfrom those expressed or implied in forward looking statements. Among thefactors that could cause actual results to differ materially from thosedescribed in the forward looking statements are Cable & Wireless' abilitysuccessfully to combine the businesses of the Cable & Wireless Group and theEnergis Group and to realise expected synergies from that combination, changesin the global, political, economic, business, competitive, market andregulatory forces, future exchange and interest rates, changes in tax rates andfuture business combinations or dispositions.Cable & Wireless undertakes no obligation to revise or update any forwardlooking statement contained within this announcement, regardless of whetherthose statements are affected as a result of new information, future events orotherwise.No statement in this announcement is intended to be a profit forecast and nostatement in this announcement should be interpreted to mean than earnings pershare for Cable & Wireless for the current or future financial year wouldnecessarily match or exceed the historical published earnings per share ofCable & Wireless.About Cable & WirelessCable & Wireless is one of the world's leading international communicationscompanies. It provides fixed and mobile voice, data, IP (Internet Protocol) andbroadband services to business and residential customers, as well as servicesto other telecoms carriers, mobile operators and providers of content,applications and internet services.Cable & Wireless' principal operations are in the United Kingdom, theCaribbean, Panama, Macau and Monaco. For more information about Cable &Wireless, go to http://www.cw.com.About EnergisEnergis is the number three fixed line telecommunications operator in the UKand the only one focused exclusively on the largest organisations in the UK andIreland. Specialising in building individual solutions for customers, itsproduct portfolio spans voice, data, internet, contact centre services andsecurity and is underpinned by a commitment to deliver superior levels ofservice. Major customers include the BBC, Caudwell communications, RAC, Royaland Sun Alliance, the UK Government, Virgin and Wanadoo.ENDCable & Wireless PLCRelated Shares:
CWC.L