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November 10, 1994


By CBR Staff Writer

The interim results of Cable & Wireless Plc have been overshadowed by the results of the 80%-owned subsidiary Mercury Communications and a restructuring plan that will see significant headcount reductions, a change in the company’s structure and a new chief executive. While group pre-tax profits rose 11.4% to UKP2.3m, Mercury’s profits fell 3.0% to UKP96m on turnover up 12.2% at UKP797.0m, as it was hit hard by the two Office of Telecommunications- mandated price cuts and hefty Access Deficit Charges in the six months. The two price cuts imposed by the regulator on British Telecommunications Plc reverberated harder onto Mercury, as a Retail Price Index minus 7.5 for British Telecom translated to RPI minus 19 for Mercury. The change in the structure on the Access Deficit Charges into domestic and international with different quotas has forced Mercury to pay more to British Telecom. Mercury’s international traffic crossed the quota in the six months and hence the company had to pay more. In the full 1993-94 year, Mercury paid UKP30m and this is set to double this full year. The expected combined impact of these regulations is around UKP100m for the full year. However Lord Young, chief executive at Cable & Wireless, is not blaming the regulatory authorities solely for Mercury’s problems. Competition Similarly the pressure of the future is not regulations. It is competition. Operating cost, excluding depreciation, as a percentage of turnover was flat in the Cable & Wireless Group, Hong Kong Telecommunications Ltd and the Caribbean, but rose 4.9% to 29.6% at Mercury. Average return on operating assets increased in all areas except the UK, which is almost exclusively Mercury. Operating profit per average employee also only fell in Mercury. Some of this can be attributed to associated undertaking Mercury One-2-One that recorded losses as expected at UKP30m and is now at or close to the bottom of the ‘J’ curve for start-ups, and will reach profitability in 1997-98. But in spite of being the best half for line growth and improved productivity for Mercury – minutes per head were up 8%, lines per head up 33%, and customer lines up 50% at 2.1m – costs have grown too fast and the proposed shake-up is necessary for future survival. Mercury has been divided into Network and Services and a software and applications division has been set up under Mike Harris, formerly the chief executive at Mercury to manage Mercury’s intellectual property rights and carry out development applicable for the whole group. Harris’s position at Mercury will be filled by Duncan Lewis, who has promised to come back in a month to give details of the redundancies and other cost-cutting measures. Cable & Wireless hopes these actions will complement changes in regulations under consideration by Oftel – regulations Lord Young believes wouldn’t survive a rational review. The interim dividend rises 8.8% to 2.83p.

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