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Cable & Wireless Tempts Vodafone With Lowest Valuation: Real M&A

Cable & Wireless Tempts Vodafone With Lowest Valuation
Vodafone, the world’s largest mobile-phone company, said this month it’s in the early stages of evaluating a bid for the London-based company. Photographer: Jason Alden/Bloomberg

With Cable & Wireless Worldwide Plc languishing as the world’s cheapest telecommunications carrier, Vodafone Group Plc and private equity firms may not be able to resist making offers for the British fiber-network operator.

After losing 70 percent of its market value in less than two years, Cable & Wireless’s equity and net debt is now valued at 1.8 times earnings before interest, taxes, depreciation and amortization, the lowest of any telecommunications carrier in the world greater than $1 billion, according to data compiled by Bloomberg. Vodafone, the world’s largest mobile-phone company, said this month it’s in the early stages of evaluating a bid for the London-based company.

While earnings are slumping at Cable & Wireless assets from the largest U.K. core fiber network to an overseas enterprise unit, Vodafone needs to boost its fixed-line system in the U.K. to relieve the strain of surging data traffic. The 722 million-pound ($1.1 billion) company, trading at a 22 percent discount to its net assets after replacing two chief executive officers since June, may also lure private equity firms, said Espirito Santo Investment Bank. With Espirito Santo estimating a price tag of 1.4 billion pounds, Cable & Wireless would still be the industry’s least expensive acquisition since 2008, the data show.

“After two years of disappointment, profit warnings, and a revolving door in the executive suite, on a valuation basis it looked almost silly,” Evan Miller, a London-based managing director at Gamco Investors Inc., which owns Cable & Wireless shares, said in a telephone interview. “It was among the unloved, at least until now.”

Slumping Valuation

Will Cameron, a spokesman for Cable & Wireless, and Simon Gordon of Newbury, England-based Vodafone declined to comment on the probability or price of a potential offer.

Once worth 2.4 billion pounds after separating from its parent company in March 2010, Cable & Wireless has since lost 1.7 billion pounds in market value. In November the company suspended future dividend payments as sales fell in its traditional voice network and announced that John Pluthero was stepping down as CEO after less than six months at the helm. The operator said Feb. 16 that profitability in its voice business has declined as contracts are renegotiated.

Cable & Wireless is now valued at 1.8 times its Ebitda of 466 million pounds in the most recently reported 12 months, data compiled by Bloomberg show. That makes it the cheapest of the world’s 131 telecommunications carriers with market values higher than $1 billion and for which Ebitda multiples are available. The industry median is 5.5 times, the data show.

‘It’s Cheap’

“If Vodafone is serious about making a bid and you believe they will, it’s cheap,” Nick Brown, an analyst at Espirito Santo in London, said in a phone interview. “The value to Vodafone is more than the current stock at this level.”

Cable & Wireless climbed as high as 29.39 pence on Feb. 14 after the Sunday Times of London first reported that Vodafone and private equity firm Apax Partners LLP may bid for the company. Vodafone then confirmed that it’s considering a cash bid and said there’s no certainty an offer will be made. Ben Harding, a spokesman for London-based Apax, declined to comment on takeover speculation.

The shares rose 1.5 percent to 26.68 pence today after earlier gaining as much as 6.4 percent.

Even after Cable & Wireless gained 62 percent this year, the shares are still valued at 0.78 times book value, trailing the industry median of 2.2 times, data compiled by Bloomberg show.

Submarine Cable Roots

Cable & Wireless, which traces its roots to 1866 when the first submarine cable across the Atlantic Ocean was laid, has holdings in more than 60 global cable systems. That legacy international business as well as the British network, the largest fiber system dedicated to businesses, may appeal to Vodafone, Paul Marsch, a London-based analyst at Berenberg Bank, said in a phone interview.

Vodafone lacks a fixed-line presence in the U.K., its only major European market not to have such a network. The operator, which said this month that data revenue climbed 13 percent in the U.K. as more customers bought smartphones, is seeking to shift the traffic onto fixed lines to reduce the strain on its wireless network.

“As an operator you either own a network or you lease capacity so you may as well just buy the factory, if the numbers work,” said Miller, whose firm Gamco manages about $35 billion.

Reputational Risk

Gavin Darby, a former Vodafone executive who took over as CEO of Cable & Wireless in November, said Feb. 16 that he will rethink network investments in the U.K. and overseas. The company plans to simplify its business and management structure and cut more head office jobs. Cable & Wireless also said it will provide further details on “more significant, strategic decisions” in May.

That may be too late, as Vodafone only has until March 12 to announce whether it will make a formal offer.

“Vodafone really needs to understand what it is buying,” said Marsch of Berenberg Bank. “The new CEO has made it very clear it’s an overcomplicated business with too many networks and too many costs associated. The question is why the last two CEOs of Cable & Wireless haven’t managed” to simplify the business, he said.

For Vodafone CEO Vittorio Colao, who has never made a takeover offer for a public British company before, there is risk associated with a possible purchase, said Berenberg’s Marsch.

Price Tag

“Many CEO reputations have foundered on the rocks of trying to run Cable & Wireless properly and turn the business around,” Marsch said. “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.”

Cable & Wireless is working to provide more transparency on the contribution of its different units, Darby, the new CEO, said last week. When Pacnet Ltd., an operator of undersea phone and Internet cables in Asia, bid for the international business last year, its offer didn’t align with the way Cable & Wireless defined its international revenue, former CEO Pluthero said on a June conference call. The proposal was rejected.

Vodafone may not be willing to pay more than 50 pence a share for all of Cable & Wireless, a 90 percent premium to yesterday’s close, said Brown of Espirito Santo. At about 1.4 billion pounds including net debt, that would value the company at 3 times trailing 12-month Ebitda, the lowest multiple for a takeover of a telecommunications company greater than $1 billion since 2008 and the fourth-cheapest on record, according to data compiled by Bloomberg. The median for the group of 128 deals with Ebitda multiples is 11 times, the data show.

‘Smoke Out’ Bidders

Vodafone wouldn’t face “scorn and ridicule,” according to Gamco’s Miller, if it pays 3.5 times his Ebitda estimate of about 375 million pounds for fiscal 2012, which ends in March. That would cost about 700 million pounds after subtracting an estimated increase in net debt, pension contributions and other factors, he said. The price could be higher depending on Vodafone’s projection for so-called synergies, he said.

“At this price, lots of people are interested,” Robin Bienenstock, an analyst at Sanford C. Bernstein & Co. in London, said in a phone interview, referring to Cable & Wireless’s current valuation.

While Vodafone can pay more than leveraged buyout firms because of Cable & Wireless’s tax benefits and potential cost savings, the March bidding deadline for Vodafone may “smoke out” private equity bidders, Brown said.

“Vodafone has the potential to pay the highest premium,” Brown said. “But clearly the private equity companies think there’s a story there and would be buying into the potential restructuring and turnaround of the business.”

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