C&W settles tax problem

Cable & Wireless announced today that it has settled significant outstanding tax issues with the UK’s Inland Revenue body, a move that will end up releasing $2.36 billion of the company’s cash from escrow.

The events that led to C&W placing this money in escrow began in 1999, with the company’s sale of its 50% stake in mobile operator One2One to Deutsche Telekom.

Under the terms of that sale, C&W agreed to cover any tax liability assessed to One2One--a provision C&W described as “normal” for such transactions.

In keeping with that provision, C&W agreed that if it’s debt was cut to junk status by Moody’s Investors service, it would set aside 1.5 billion pounds, or about $2.36 billion in today’s dollars, to cover this potential liability. In December 2002 Moody’s cut C&W to junk, forcing the company to reveal the tax liability and place the money in escrow. The announcement was greeted with fury from the investment community, which had not known of the liability and which had viewed C&W’s cash position as one of its strong points. In an apparent bow to this pressure, C&W appointed new company directors and rearranged its board in January 2003. Today’s agreement with the UK’s tax authority should draw this series of events to a close. Under the terms of the agreement, C&W has already paid about $596.6 million to settle all of the company’s open obligations for the 10-year period ending March 31, 2001. According to a C&W spokesman, the company made the payment to Inland Revenue yesterday, and the money currently in escrow should be released shortly. The release of this cash should provide a significant boost to C&W’s net cash position (cash minus debt), which stood at $3.48 billion on September 30, 2002, the most recent date for which C&W financial results are available.