Cable & Wireless signals survival

The market shrugged off yesterday's 22 per cent fall in profits from Cable & Wireless - the pounds 300m exceptional charge had been pretty well flagged - and the shares closed just 5p lower at 422p. But the results did nothing to clarify how to value a company which continues to look expensive on the basis of earnings but cheap on a sum-of-parts view.

Attention as usual focused on Mercury, whose well-rehearsed problems seem to be reacting more quickly than feared to new boss Duncan Lewis's radical surgery. The speed of improvement suggests that the division was run a lot less well than the market realised. Getting Mercury back on a growth tack will take time, however, and without healthy underlying demand, the fall in profits to pounds 203m could have been a lot worse.

But Mercury is only one part of C&W's federation of businesses and its importance should not be overestimated. In Hong Kong, Cable's share of profits jumped 10 per cent to pounds 810m, two thirds of the total, and the Caribbean rose by a similar margin to pounds 171m.

The market remains reluctant, however, to accept the company's view that there are tangible benefits to be had from a collection of stakes in second- line telecoms companies around the world.

It still refuses to value the company at much more than the implied value of C&W's Hongkong Telecom stake, sometimes at nothing at all.

You do not have to be a brilliant arbitrageur to realise that when the constituent parts of the company are worth maybe 500p a share, there ought to be a good chance that either a third party will take advantage of the discrepancy and launch a takeover bid or management will attempt to unlock some of that value themselves.

Unfortunately, neither option is looking that likely, despite persistent chatter in the markets about interest from all the usual suspects - AT&T, BT, Bell Canada.

Analysts now think that a recent clutch of deals may have created a sufficiently complex structure to scare off potential predators and, although prepared to trim capital expenditure to boost short-term profits, Lord Young still seems reluctant to countenance anything more radical.

That being the case, the only sensible way to value C&W is on its profits, which according to NatWest Securities should bounce to pounds 1,245m in the year to next March and pounds 1,400m the following year. On that basis, the shares stand on a p/e of 16 falling to 14.5, roughly a 25 per cent premium to the rest of the market. That is hard to justify, and a yield of under 3 per cent provides no support.