Cable & Wireless Worldwide tie-up with Vodafone on the cards

Now Cable & Wireless Worldwide is on to its third chief executive in eight months, why stop there? Number four could just be a phone call away – assuming Vodafone boss Vittorio Colao picks up his handset.

Alastair Osbourne at the Telegraph writes

He may have to pay more than the £700m the market was buzzing with on Monday after the Takeover Panel forced the mobile phone operator to admit it was having an early look at C&WW. But the fixed-line provider of “high-quality voice, data, hosting and IP-based services” could make a decent fit for Vodafone. What’s more, according to the Telegraph, no one could make more of a hash of running C&WW than its previous management – whatever the talents of Gavin Darby, its latest chief executive.

Darby, himself a Vodafone old boy, only pitched up in November on a salary of £600,000, similar size bonus and all-share welcome pack, not to mention a possible £1.2m a year of performance shares. It’s a zippy world telecoms, so shareholders were predictably livid that C&WW initially told them they must wait until May for Darby’s turnaround plan.

Due to popular demand, that was delivered yesterday, with the half-year results.

Telegraph Media telecoms and technology Editor Katherine Rushton writes, “Darby, [CWW’s] newest chief executive, used the interim management statement to set out the scale of the challenge facing CWW, which he said had been damaged by long-term underinvestment and poor execution.

“We operate in some tough markets but we do it on an overly complicated business model…compounded by a track record of poor execution. We haven’t delivered, often, on what we’ve planned to deliver,” he said.

He said, for example, that CWW had not been able to keep pace with accelerating demand for data storage capacity, simply because his predecessors had not invested sufficiently in the rapidly growing business.

Mr Darby’s first interim management statement as chief executive was also CWW’s first quarterly report for more than a year that hasn’t been marked by a profit warning or a change of management.

The former Vodafone executive is the company’s third new boss on a year, following Jim Marsh who was ousted with a £650,000 pay off after a hat trick of profit warnings, and John Pluthero who lasted six months but will remain in the background until March in an advisory capacity.

“I was clearly of the opinion [when I took the job as CWW chief executive] that this was a challenged business and I have seen nothing in the last 60 days which changes my mind,” Mr Darby said.

However, he added at a meeting with analysts that the company was “fixable”, despite the tumult. He said he had been struck by the “disproportionate” loyalty from its customers, which include 70 of the FTSE 100 and major public sector institutions including the police and the National Health Service.

CWW will spend the next three years focussing sharply on cash to invest, he said, and will restructure its incentivisation model so that executives are rewarded for cash-generative deals, not just margins.

Mr Darby has also set up a new, small “change team”, reporting directly to him and responsible for ensuring the turnaround of the business.

The lack of investment in CWW makes a strong case for the business to be bought, but there was no overt mention of the news that Vodafone is eyeing the business, whatsoever.

Vodafone confirmed on Monday that it is considering making a bid, likely to value CWW at between £700m and £900m.

It was forced to make a statement by the Takeover Panel, which has set a “put up or shut up” deadline of March 12, placing CWW and Vodafone in a closed period.

Shares in CWW had lost four fifths of their value over the last two years, but rocketed 45pc on Monday on Vodafone’s announcement.

Colao’s interest looks well-timed. Ever since the business split in March 2010 from the Caribbean-focused Cable & Wireless Communications, the quality of C&WW’s assets has been obscured by hapless management. Darby’s predecessor Jim Marsh was ousted in June after his third profits warning, triggering the return of John Pluthero, who proved a poor chairman. Together they presided over a 75pc fall in the shares, a suspended dividend and, lately, £624m of writedowns.

What incentive they had for improvement is anyone’s guess. Pluthero had already trousered £10.2m from the old Cable & Wireless incentive scheme, while Marsh pocketed £9m.

C&WW blamed Government cutbacks and the recession for its woes. But you have to think Colao could get more out of the assets. C&WW owns the UK’s largest fibre network for business users, spanning 20,500km, plus some 425,000km of international wires that combine with satellites to link 150 countries. Its customers include Tesco, Boots and Ryanair, not to mention the police and parts of the NHS.

Voda could do with C&WW for two reasons. First, it would strengthen its network, not least in the UK. Mobile operators already need to buy in fixed-line capacity to link their radio masts and carry the ever-increasing volumes of data over the internet. As Voda already rents such capacity from the likes of C&WW and BT, it would recoup part of any purchase price.

Second, with the mobile consumer market close to saturation point in the UK, buying C&WW would bring Voda more clout in the corporate world, providing customers with a one-stop shop for both mobile and fixed-line communications.

How much Colao reckons that would be worth to Voda is hard to gauge. The mooted £700m is a 30pc premium to last week’s closing price. But on conventional multiples of earnings before interest, tax, depreciation and amortisation, it’s a hardly generous less than four times. AfterMonday’s share price rise, C&WW was valued at £783m. Its share price fell back yesterday more than 5pc to below 26p, rallying slightly to 27p by close .

Colao may have to pay a bit more. But C&WW investors must be gagging for his call.

If you have Cable and Wireless as a tenant or licensee on one of your properties this may affect its ongoing income stream. Cell:cm are happy to advise you on the options available to maintain your asset.

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