Cable & Wireless approaching decision day on US Operations

Speculation about the fate of Cable & Wireless' American hosting operation is nothing new. But the latest media reports are focusing fresh attention on US bankruptcy law and the options it offers for restructuring telecom assets.

Cable & Wireless plans to exit the US hosting market and has been trying to sell operations that include at least 12 data centers. C&W had no specific comment yesterday on reports that the company's US operations will shortly file Chapter 11, a possibility it acknowledged in June, saying it would "consider all options" for disposing of the assets it purchased from Exodus Communications and Digital Island.

Real estate is a key stumbling block for C&W in selling its American hosting unit. The company has estimated its US property lease obligations at $667 million (400 million pounds), while the hosting operation has an annual operating loss of $425 million (255 million pounds). Exiting those leases would require financial settlements with landlords, with some analysts pegging the cost of shutting down the US business as high as $1.3 billion (800 million pounds).

A Chapter 11 filing could dramatically change that math. Under the US bankruptcy code, debtor companies can reject unwanted property leases without further obligation, and renegotiate retained leases to reduce expenses. US telecom companies including MCI and AboveNet have used these strategies shed surplus properties, including data centers, while keeping a smaller network footprint going forward.

While the flurry of telecom bankruptcies has diminished the stigma of Chapter 11, a filing would likely be viewed as a last resort for a multinational brand like Cable & Wireless. If the US unit can be effectively severed from its corporate parent, a bankruptcy filing would allow C&W to slash the cost of an outright shutdown of its US unit. It could also serve as an effective strategy to facilitate a sale, allowing a buyer to acquire customer contracts and a core of facilities in key markets.

Numbers of sites hosted at Cable and Wireless have fallen over the last two years, but many busy sites ranging from Slashdot to Cosmopolitan are still hosted there, with site owners apparently still hoping for the best despite its financial distress.