As a Vodafone (VOD) shareholder, I think that Vodafone's takeover of Cable & Wireless Worldwide (CBWWF.PK) this week for 38 pence ($0.51) per share in cash -- valuing the company at roughly £1bn ($1.6bn) -- represents excellent value.
Vittorio Colao, chief executive of Vodafone, commented:
We are pleased to reach agreement with the board of Cable & Wireless Worldwide, who unanimously recommend our offer. The acquisition of Cable & Wireless Worldwide creates a leading integrated player in the enterprise segment of the U.K. communications market and brings attractive cost savings to our U.K. and international operations.
Not only that, the acquisition should see earnings growth revitalized in the U.K. and support its dividends going forward. Here's why:
1. Cable & Wireless Worldwide's U.K. fiber network
Until now, Vodafone lacked a fixed-line presence in the U.K., its only major European market not to have such a network. The transaction will give it in-house fixed-line capacity alongside its wireless network. Even after upgrading Cable & Wireless Worldwide's network migrating traffic, currently carried by third parties such as BT Group (BT) and others, onto Cable & Wireless Worldwide's network is likely to generate substantial savings in the mid-term.
Vodafone, like other mobile operators, has been struggling with data capacity as a result of the explosion in Internet traffic from its customers' smartphones and surging data traffic. Cable & Wireless Worldwide's fixed-line network will allow Vodafone to reduce the strain on its own wireless network while it shifts the traffic onto Cable & Wireless Worldwide's fixed lines. Cable & Wireless Worldwide's U.K. fiber network is the second-largest enterprise backbone in the United Kingdom after BT Group, the incumbent telecom operator.
2. Bundled services
To compensate for slowing growth in the consumer mobile market, Vodafone has been keen to grow its corporate business. Cable & Wireless Worldwide's portfolio of enterprise customers -- including Tesco (TSCDF.PK), pharmacy-led health and beauty group Boots, airliner Ryanair (RYAAY) and various public sector organizations such as the police and the National Health Service -- will double Vodafone's corporate business in the U.K.
Cable & Wireless Worldwide's fixed-line network will also mean that Vodafone can now offer integrated (landline, mobile and data) services to its corporate customers, without reselling BT capacity, as confirmed by Vodafone's CEO Colao:
The acquisition of Cable & Wireless Worldwide creates a leading integrated player in the enterprise segment of the U.K. communications market and brings attractive cost savings to our U.K. and international operations.
The deal would allow Vodafone to target larger and more complex business customers and help with a wider global partnership push with U.S.-based Verizon.
3. Likely disposal candidate
Cable & Wireless Worldwide traces its roots to 1866 when the first submarine cable across the Atlantic Ocean was laid. Since, it has built a network of 425,000km of undersea cables connecting around 150 countries, with holdings in more than 60 global cable systems.
While Vodafone can use Cable & Wireless Worldwide's cable network to move its own international calls, some commentators are expecting it to sell off parts of Cable & Wireless Worldwide's undersea cables network and associated holdings, with groups such as AT&T (T), Verizon (VZ), Tata Communications (TCL) and Pacnet already seen as potential contenders. Hong Kong-based Pacnet, an operator of undersea phone and Internet cables in Asia, bid for Cable & Wireless Worldwide's international business last year, but its offer was rejected. This time it may be different.
Selling off part of the undersea cable network will allow Vodafone to reduce the cost of the acquisition, perhaps by as much as £250m ($400m) -- or even more.
4. The deal is a steal
At a take-out price of about £1bn ($1.6bn), Vodafone secures Cable & Wireless Worldwide at a value of almost 2.7 times trailing 12-month EBITDA, the lowest multiple for a takeover of a telecoms company greater than $1bn since 2008, according to data compiled by Bloomberg.
Last December, analysts at Investec estimated that Cable & Wireless Worldwide could be worth around £2.5bn ($4bn) if it were split up and be sold off in parts, instead of purchased as a single listed entity. It valued its biggest asset -- its U.K. fiber network -- at around £1bn ($1.6bn) of that figure.
And then there are the £5bn ($8bn) of capital allowances belonging to Cable & Wireless Worldwide, which (in part) Vodafone may be able to utilize, with Vodafone's CFO confirming:
The company would be able to use the allowances but stressed that the tax benefits were not a key part of the deal's rationale.
Sure, he would say that following a recent tax dispute over a £1.25bn ($2bn) settlement regarding Vodafone's Luxembourg subsidiary. And don't forget the ongoing tax saga in India.
Are there any risks?
Vodafone's CEO Vittorio Colao has never made a takeover offer for a public British company before, and there is a risk associated with the purchase, according to Berenberg's Marsch:
Many CEO reputations have foundered on the rocks of trying to run Cable & Wireless properly and turn the business around. If they misjudge what they're buying, or their ability to turn around what they're buying, then the reputational damage could be out of proportion to the actual financial impact.
I think this purchase was very much a one-off opportunity where Vodafone saw a chance to pick up an interesting asset at a great price. But I do not think that this U.K. "add-on" acquisition signals that the company is going on another multibillion buying binge anytime soon.
When properly absorbed, the deal clearly transforms Vodafone into a major integrated telecoms business in the U.K., offering for the first time fixed and wireless communications and moving it from fourth to second place, only behind BT. In addition, it will double its corporate business in the U.K., while substantial disposal(s) as well as tax rebates may make this deal an absolute steal.
In the next few years, the deal is likely to yield substantial operating cost benefits in the U.K., with not only subsequent enhanced earnings potential, but also putting dividend growth prospects on a firmer footing going forward.
Disclosure: I am long VOD. We run the Dividend Income Portfolio, which owns a shareholding in Vodafone Plc, purchased when the share was historically undervalued as per our valuation methodology.