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The American Revolution At Cable & Wireless


International Business: BRITAIN

THE AMERICAN REVOLUTION AT CABLE & WIRELESS

Yank Richard Brown is moving to make it a global player

`Kansas Cowboy Hits Town." That's the way one British newspaper described Richard H. Brown's appointment as the new CEO of Cable & Wireless PLC in May. Sure enough, since taking over the top spot at Britain's troubled No. 2 phone company on July 1, Brown, an American who was recruited from Kansas City-based H&R Block Group Inc., has proven himself a quick draw.

On Oct. 22, Brown unveiled a plan to create an $8 billion communications powerhouse by merging C&W's British phone operation with three top cable companies. C&W's stock surged nearly 6% on the news, to $7.42 a share. Two weeks earlier, Brown managed to recruit German utility RWE as a key partner in Germany--swiping it away from archrival British Telecommunications PLC. And in coming months, the 49-year-old executive is aiming to strike a deal with partners in Italy and France. That will boost C&W's presence on the Continent when Europe's phone market deregulates in 1998.

But it will take more than a few quick deals to transform C&W from an $8.7 billion holding company for a collection of mostly second-tier phone companies in such places as Tonga, the Seychelles, and the Cayman Islands to a focused international communications provider. Aside from needing a strategic rethink, C&W must catch up with BT and AT&T in finding global partners. Only then can it compete effectively for big corporate customers--the first step toward offering international services to consumers, as well.

With the cable merger, Brown is tackling C&W's most vexing problem: the poor performance of its British telephone unit, Mercury Communications Ltd. The unit is getting squeezed by its much bigger rival, BT, which has been forced by regulators to drastically lower prices. Mercury's costs have also soared, crimping operating profits. In 1995, Mercury's earnings plunged 41% after exceptional items, to $227 million on sales of $2.6 billion.

After laying off 2,500 workers, about 20% of its workforce, Mercury's profits climbed back up to $367 million in the year ended Mar. 31. But with Mercury's market share stalling at around 11%, Brown figured he needed to go beyond just handling the cable companies' long-distance and overseas calls. If the merger goes ahead, C&W will control Britain's single largest cable operator--giving it an extensive network of coaxial cable that can be used to deliver phone, TV, and data to homes.

About three weeks ago, Brown got in touch with Nynex Chairman Ivan G. Seidenberg and Bell Canada International Inc. Chairman Derek H. Burney to talk about merging their British operations with those of C&W, and letting C&W manage them. In exchange, the partners will get stock in the new company, to be called Cable & Wireless Communications, in addition to some cash.

It was an offer that was hard to refuse. Nynex CableComms Group PLC, Britain's second-largest cable player, and Bell Cablemedia--the No. 3--together count 365,000 British homes as customers. But they continue to lose money. And like the rest of Britain's young cable industry, they've suffered from a lower-than-expected number of cable TV subscribers. Indeed, the whole multibillion-dollar experiment to build the world's most advanced Information Superhighway in Britain has been disappointing for the North American investors that backed it. But with the heaviest startup costs completed, industry cash flows are turning positive. The timing of Brown's investment may prove smart.

WELCOME MOVE. Brown's bet is that the cable group he is now creating will have much more market power and will fare better. The new entity couldserve 6 million homes, of which 2.5 million are already wired for cable. The goal: To offer customers one-stop shopping for a rich mix of voice, data, and video services--all consolidated under one bill. The result could be a powerful competitor to British Telecom, which is barred by regulators from offering entertainment services until 2001.

With estimated cost savings of up to $240 million in coming years, the new company will also have more clout in negotiating programming rates with British Sky Broadcasting. Brown plans to sell shares in Cable & Wireless Communications in New York and London next spring.

That may be a welcome move, since so far, Brown is dazzling investors. But guiding Cable & Wireless through the industry's coming free-for-all ain't going to be a Kansas City stroll.By Julia Flynn, with Heidi Dawley, in London, and Peter Elstrom in ChicagoReturn to top


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