CABLE’S LAST STRAND

It’s difficult enough to merge four companies without having to do it in one of the UK’s most cut-throat markets where the main rival is committed to spending 200m on advertising next year.

Nevertheless, this is what Cable & Wireless is doing. As of next month Mercury Communications, Nynex Communications, Bell Cablemedia and Videotron will be merged into a single global player. Cable & Wireless Communications, unveiled as a temporary name in October, now has more permanence, although there is an internal expectation that brands will be launched under the CWC banner.

The merger will create a company valued at 5bn when it floats on the London and New York stock exchanges on April 2 – it was going to be April 1 but superstition will postpone it for a day. It is also a second chance for Cable & Wireless: the company has squandered the potential of Mercury since its launch and wasted the best opportunity any company has had in the UK to challenge BT’s dominance.

Liberalisation of the telecoms market in the UK could attract as many as 44 new operators in the next 18 months, but the new CWC is the only credible rival to BT in the UK.

What will the new challenger look like? A telecoms company that happens to be the biggest cable operator in the UK? A telecoms company which appeals to the business market but can now, with its new access to entertainment, also attract more domestic users? Or a company that is potentially stretching itself too thinly across different sectors, mirroring the dilemma which hampered the development of Mercury?

“Mercury is a 2bn company and well over 90 per cent of its business is telephony and that is where its emphasis will remain,” says one insider. “But the merger gives Mercury three things: an extra 6 million homes where cable has a local loop; the opportunity to offer added-value services; and 400m of tax credits which represents a significant fighting fund.”

According to internal sources CWC has already begun plans for an advertising and marketing campaign, although its hands are tied until April because of stock exchange rules restricting promotional activity ahead of flotation. This offers BT three months to cement its existing relationships with business clients, the area that Mercury still depends on for the majority of its income, and make tempting offers to others. BT’s business communications division has increased its marketing budget to over 90m this year, up from an estimated 40m last year – a reflection of the potential threat that the new-look CWC poses.

“Someone at CWC has to decide how to develop the brand, who it wants to sell to and what it is going to sell,” says a former C&W source. “Mercury has been strong in the business market and now the new company is also getting into entertainment supply. It cannot afford to get out of either but cannot exploit both unless it gets a big investment shot from the stock market.

“But C&W has traditionally looked at Mercury in terms of its returns: it is a profit oriented company run by accountants. So even if it gets the investment needed, there will be questions over whether the company will invest or lose something that it is lucky to have – a second chance.”

Of the four companies being merged, Mercury is the only profitable one, the others recording combined losses of 132m in the past year.

The trigger for any decision-making will be the appointment of a CWC chief executive. Candidates are understood to include the chief executives of three of the four companies involved in the merger: Bell Cablemedia’s Dan Somers, Mercury’s Peter Howell-Davis and Nynex’s John Killian. C&W chief executive Dick Brown, the person driving the revamp of the company, has a brief for the job that includes the terms “American” and “cable experience”.

Once a chief executive is appointed – it is expected later this week – the merger will accelerate. People expect a slimming down of the workforce from a combined 13,500 to 7,000 people.

There are other difficult decisions still to be made. Near the top of the agenda are the future advertising, marketing and positioning of the new brand. Almost needless to say, there is also intense jockeying for position within the combined marketing operation: four marketing directors cannot occupy one position.

“It has to get all the businesses integrated to take advantage of efficiencies of scale, develop a new brand and establish a strategic positioning for the company,” says one City analyst. “It is then going to have to combine the marketing, purchasing and other functions.”

The move was welcomed in the City last October as it gave C&W access to a potential 6 million homes within franchise areas – overnight it had access to more than 30 per cent of the theoretical cable market. But observers believe it could also give the cable industry the fillip it needs if it is ever to prove itself.

“The most important result of the merger is that it will give the cable industry a focus,” says Adam Stanhope, managing partner of teen cable channel Rapture. “It means that if a decision is made, then things will actually happen. In the past there were too many people following different paths.”

He adds: “Nynex and Bell were actually quite aggressively marketed. They are well established in their areas, so the new brand may have to do a little going backwards before it can move on. But it should have a really good combined marketing operation.”

Ironically, the size of the opportunity for CWC is best illustrated by the failure of the cable industry so far. Only 21 per cent of homes passed by cable operators are connected to TV services. This amounts to 1.5 million homes which are estimated to rise to 3.8 million by the year 2000 – so there is theoretically 79 per cent of the market left to be attacked.

Significantly, media industry observers, often scathing about cable’s slow progress, forget the operators have the difficult bit behind them – the engineering work. Now it is a marketing and programming job.

Both C&W and TeleWest are understood to be planning equity in-vestment in programming companies to give them more say over output.

However, some believe the cable companies are stuck with old-fashioned thinking: “There are no short cuts into the industry,” says one source. “Too many companies still think mass when they should be thinking niche. Terrestrial broadcasters have something for everyone, so should cable. There has to be more than movies, sports and repeats.”

Some observers have suggested that CWC’s best bet is to try to steal the US consultant Ed Carter from BT. He has injected aggression into BT’s recent advertising and, significantly, has been heavily involved in advising the business division since the C&W merger was announced. But Carter is not available.

“If CWC puts in the time, the effort and the investment, it should get it right and be a strong challenger to BT,” says a former C&W insider. “But if C&W looks at it in terms of short-term cash, it will end up with a weak brand. It only has limited time. In July BT will be freed from Oftel restrictions on its pricing, and then things will get really bloody.”