Don't look now, telecom fans, but British communications giant Cable & Wireless (NYSE:CWP) is going on another shopping spree.
Yesterday, the company announced that it will pay approximately $1.07 billion in cash up front and as much as $145 million more in three years, as well as pay off roughly $230 million in debt and invest an additional $63 million -- all to acquire privately held British voice and data network provider Energis. Tally up all the various costs, and this transaction looks to be worth more than $1.5 billion.
News of the deal had an immediate effect on C&W's stock price, which dropped by more than 5% yesterday. To understand why, you need to recall the company's checkered past in the field of resource conversion. It's been less than five years since C&W anted up $850 million to add U.S. Web hosting firm Exodus to its U.S. arm. Back in December 2001, C&W was swimming in cash and virtually unrivaled in the telecom sector in its ability to buy up distressed assets and convert them into money-printing machines. But through the combination of poorly timed buys, similarly poor business execution, and a generally abysmal market for telecom services, C&W had squandered nearly $4 billion of its $6 billion cash hoard by 2004. When it finally cut bait and sold its U.S. operations to Savvis Communications (NASDAQ:SVVS) in March 2004, it was willing to part with the whole U.S. subsidiary for just a fraction of what it had paid for Exodus alone a couple of years earlier -- about $170 million in all.
Investors, it seems, fear that C&W may be repeating its past mistakes by paying too much to acquire Energis. At $1.5 billion, this latest acquisition will take a heavy toll on the company's rapidly dwindling cash reserves. And as for the price per se, C&W will be paying roughly 1.2 times Energis' 2004 sales of $1.2 billion to acquire the company -- an even valuation with C&W's own 1.2 price-to-sales ratio.
While that might almost seem a fair price, consider that similar telecoms back in the U.S. -- MCI (NASDAQ:MCIP), AT&T (NYSE:T), and Level 3 (NASDAQ:LVLT) -- all sell for much cheaper multiples than do C&W or Energis. None of the three U.S. examples receives a multiple in excess of 0.6 to its fiscal 2004 sales.
Given the high price, then, let's hope that this time C&W at least gets what it paid for.
Forgot there ever was a company named Cable & Wireless? We almost did, and here's why:
- C&W Quits Digging
- Is What You Know Actually True?
- C&W Telegraphs Better Times
- C&W: Unable & Hopeless
Fool contributor Rich Smith does not own shares of any company named above.
