Vodafone CWW deal hits potential road block

The operator’s £1 billion takeover Cable & Wireless Worldwide is a game changer, but the telecoms provider’s biggest shareholder could block the deal

Vodafone’s agreed £1 billion takeover offer for Cable & Wireless Worldwide (CWW) will fundamentally change the face of UK telecoms if it goes ahead. Hurdles remain, more of which later, but Vodafone is now the only bidder in town after India’s Tata Communications was forced to wave ‘ta-ta’ after failing to come up with an acceptable price. Tata is rumoured to have offered only 25p per share for CWW, whereas Vodafone has tabled what it described as a final offer of 38p per share.

The benefits of the deal for Vodafone are more obvious, which is why Vodafone chief executive Vittorio Colao (pictured) can afford to pay more. It’s his most significant acquisition since he took the role four years ago. Colao said the acquisition would create “a leading integrated player in the enterprise segment of the UK communications market, and brings attractive cost savings to our UK and international operations.”

CWW boasts the UK’s biggest fibre network dedicated to businesses and owns an international cable network that spans Europe, India and Asia. Analysts say the biggest pluses for Vodafone UK, which would leap from number four to number two in British telecoms behind the number one, BT, is that it can expand its business offering into fixed line and cross-sell mobiles to existing CWW customers.

Ian Watt of Enders Analysis said that the impact of the deal, “while gradual, would reverberate for years to come”.
Watt identified three of the potential benefits for Vodafone: “Selling unified communications services into corporates as a single supplier; using Vodafone distribution assets (such as shops and mass-market telesales) to sell fixed services based on CWW’s network to small and medium-sized businesses and rationalising the overlapping sales forces.”

Watt said Vodafone apparently has ‘hundreds’ of corporate sales people in the UK, and CWW has around 1,500, “who are currently targeting the same decision makers in the same corporate customer base”.

Unsurprisingly, the Communication Workers Union was quick to raise concerns over job losses. From a business perspective for Vodafone, the combination makes sense because, while triple play remains relatively unproven in the domestic market, in the business telecoms market, fixed and mobile services tend to be bought by the same purchasing professional on much the same criteria.

Vodafone already dominates business mobile telecoms in the UK, with around 40 per cent of small and medium-sized enterprises (SMEs) and between 50 and 70 per cent of corporate and government clients, according to Enders.
“So the growth potential is likely more in fixed than mobile, given CWW’s market share of roughly 20 per cent in UK corporate/government wireline telecoms and very modest presence in SME,” says Watt.

The other benefit for Vodafone UK is the ability to save on so-called “backhaul” costs – the price it pays to other providers to carry traffic between its masts and base stations. At the moment it relies heavily on BT, but it could switch some of that traffic to CWW’s underground data network, which stretches to over 20,000km in the UK alone.

Analysts say the savings here are likely to be helpful but modest. They also point out that there would be a difficult period of integration during which BT and Virgin Media, which is focusing heavily on business customers, could actually benefit. Enders noted the disruption that went on after CWW bought business telecoms rival Energis, when the merged entity lost a lot of customers.

But another potential plus for Vodafone is the tax losses that CWW has racked up over the years, which it might be able to make use of. Colao was cagey about that however, and it can take years to try and use tax losses, often with limited success.
Right now Colao’s focus is on getting the bid over the line. Vodafone and its advisors, UBS, Citigroup and JPMorgan Chase, have set the hurdle high because they are structuring the offer as a so-called “scheme of arrangement”.

That basically means the company needs approval from 75 per cent of voting shareholders, as opposed to the 50 plus per cent normally required under a takeover. Colao has already won the support of shareholders speaking for about 18 per cent of the shares but he’s hit an unexpected hurdle in the form of CWW’s biggest shareholder, Orbis Investment Management.

Orbis holds more than 19 per cent of the shares, so it could effectively block the deal.

Orbis says it is not happy with the offer price, even though it represents a 92 per cent premium to the price CWW was trading at before news emerged, in February, that Vodafone was considering a bid.

That’s because the CWW share price remains well below the price at which it was demerged from its sister operation Cable & Wireless Communications, which operates in several former UK colonies, back in March 2010. Orbis held 6.8 per cent of the share back then and has increased its holding at an average of 53p per share over the past two years, according to reports based on banking sources.

Orbis would almost certainly realise some painful losses if the 38p per share offer is successful, so it’s no wonder it is hoping for more money. It pointed out that “the proposed deal is clearly attractive for Vodafone shareholders”, but said it was “concerned that the offer price does not appear to reflect the value inherent in CWW”.

“Although we believe the CWW management team has handled the bid process responsibly, we have declined to give an irrevocable undertaking or letter of intent to support the transaction,” Orbis said in a statement. Whether the fund manager really digs its heels in remains to be seen. If Vodafone walks away, the share price will tank and Orbis may face a long wait before the share price recovers to its current level.

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