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VOD - Vodafone

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The approach from Vodafone for Cable and Wireless Worldwide (CWW) shows how the mobile giants have usurped their fixed-line peers. The deal is “opportunistic” on price as it follows a difficult period for CWW but does make sense on an operational front.

The diverging fortunes of Vodafone and Cable and Wireless are evident in their divergent abilities to retain value following the peak of the tech boom in 2000. Vodafone has seen its shares fall by just over half but Cable and Wireless has seen its stock plummet over 90%.

In terms of market value Vodafone is now the third largest listed group in the UK with a market value of around £85bn. Cable and Wireless has now been split into two businesses - Cable and Wireless Communications & Cable and Wireless Worldwide – with both having a market value of less than £1bn.

The business that Vodafone is looking to buy is Cable and Wireless Worldwide (CWW) which started trading in London as a demerged entity in March 2010. Since then the stock price fell from around 90p to a low of 14p following a series of profits warnings.

Vodafone’s bid is at a price of 38p which is at a 92% premium from the price of the stock before the offer period and a 107% premium to the average stock price in the three months prior. However, in a longer-term context it is seen by Vodafone as an “opportunistic” bid given CWW's difficulties.

For Vodafone stockholders the deal is not a huge one at around £1bn but it nevertheless makes sense and looks attractive. In the broader context it comes as Vodafone has sold off minority owned subsidiaries in recent years to re-focus after a previous acquisition binge.

On a valuation basis the offer looks strong not least as there maybe the opportunity to utilise some of CWW's tax losses. UK cost savings will also be key as Vodafone will be able to use CWW's network instead of paying to use the network of BT.

The deal looks to be sound for Vodafone from both financial and a strategic perspective. The key is that it underwrites the ability to grow in the enterprise market by providing potential customers with a strong, fully-owned fixed-line solution as well as a mobile offering.

Looking at Vodafone's Q3 results and organic service revenue saw 0.9% growth which was below the 1.4% seen in the first half. This was as a decline in service revenue in Europe was only just offset by growth in faster growing Africa, Middle East and Asia Pacific (AMAP) countries.

Overall, whilst Indian tax issues remain a concern - along with European regulation - Vodafone looks to continue to benefit as emerging market growth and data revenue growth more than offset this. The group is a play on the growth of mobile devices which the recent results from Apple Inc show are booming.

This report was produced by Senior Research Analyst, Aamer Nawid

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