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Cable & Wireless Facing Unexpected £1.5 Billion Tax Bill

by Jason Gorringe,, London

11 December 2002

Telecommunications giant, Cable & Wireless is this week facing slumping share prices and a £1.5 billion ($2.4 billion) tax liability as a result of an unexpected chain of events, according to recent reports.

Ratings agency, Moody's Investor Services on Friday cut the company's long-term rating from investment grade to junk status, triggering a clause in an agreement with Deutsche Telekom, to which C&W sold its half share of mobile phone company One2One in 1999.

Although Cable & Wireless has refused to comment on the exact terms of the deal - upon which they were advised by Andersen, Enron's former auditor - it is believed that that the British group avoided paying any tax on the £3.45 billion which it received from the disposal of One2One, but promised Deutsche Telekom that it would meet any tax liability which occurred as a result of the transaction.

According to The Times newspaper: 'That was backed up with a further pledge to guarantee £1.5 billion if the company's credit rating fell, as it did on Friday night, from investment grade status.'

Cable & Wireless has stated on several occasions that it does not expect to have to pay this liability, and has begun talks with Deutsche Telekom in an attempt to renegotiate the 1999 agreement. However, without details of the exact nature of the tax deal in question being available, it is difficult to predict the likely outcome.

Analysts and shareholders alike are not optimistic, however. Prior to Friday's rating downgrade, no indication had been given to either of this massive liability-in-waiting, which could potentially swallow some two-thirds of the company's net cash holdings.

Amid calls for CEO, Graham Wallace's resignation, The Times on Tuesday quoted a morning circular from analyst Dresdner Kleinwort Wasserstein as observing gloomily that:

'Investing in C&W is like buying what appears to be massively undervalued real estate at the foot of an active volcano.'

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