Dominic White looks at the speculation surrounding a possible move by Vodafone to buy the telecoms provider
It’s probably a safe bet to say that Vittorio Colao didn’t send Gavin Darby a Christmas present last year.
But the Vodafone Group chief executive is about to make the former Vodafone UK boss considerably richer if his plan to buy the company Darby now works for comes to fruition.
The downside for Darby is that he would probably be out of a job.
News that Vodafone Group is mulling a bid for Cable & Wireless Worldwide caused shares in the latter company, which supplies bandwidth to other telcos and telecoms services to big corporates and government departments, to leap almost 50 per cent the day before Valentine’s Day.
Colao (pictured) now has until March 12 to “put up or shut up” – if Vodafone doesn’t make an o er before then, it can’t bid again for another six months under the takeover rules.
At the time of writing this, it remains far from certain whether Vodafone will make an offer for C&W Worldwide, which would cost the best part of £1 billion to buy after that share price spike.
No talks had actually taken place between the two companies and UBS, the investment bank that advises Vodafone, had been doing all of the work behind the scenes.
But the logic of such a move looks pretty compelling, even though C&W Worldwide is in fixed line, which is not Vodafone’s main business.
Vodafone needs more bandwidth. The explosion in data traffic shows no signs of abating as more and more people buy iPhones and Android smartphones and use them to watch video.
As a result, Vodafone is having to shell out ever more in carriage fees to companies such as C&W Worldwide, VirginMedia and BT to carry the traffic between its base stations underground in their pipes.
If it bought C&W Wireless, with its vast cable network, Vodafone could save billions in ongoing operational expenditure, boosting profits at a time when margin pressure shows no signs of easing.
“Owning its own infrastructure would limit the higher charges for backhaul that would arise from renting more capacity from a third party, and should improve margins,” analysts at Bernstein Research said in a note to their clients.
It would also improve the customer experience to have amore reliable network.
The share price crash of four-fifths that has taken place at C&W Worldwide over the previous two years has left it vulnerable to takeover and Vodafone has become the obvious buyer.
Unlike many of its peers Vodafone has a very strong balance sheet, with relatively low debt, due to the swathe of disposals that Colao has undertaken in the past couple of years, exiting China, France and elsewhere and unwinding the empire built by his predecessors Sir Christopher Gent and Arun Sarin.
Whereas Gent and Sarin spent many billions acquiring (for the most part) other mobile operators, Colao’s first major purchase – if it happens – will be in fixed line.
What he really wants is C&W Worldwide’s big fat pipes. A side benefit would be that the target company has strong relationships with 70 companies in the FTSE 100 and most government departments: a great opportunity to cross-sell Vodafone’s mobile services to those massive customers.
But while it all looks neat and tidy as a prospect on paper, the reality could be very different if Colao actually takes the plunge and makes a successful offer.
C&W Worldwide is a notoriously accident-prone company. It was demerged from Cable & Wireless, which has stakes in various ex-government-owned telecommunications monopolies in former colonies around the world, less than two years ago. In the past year it has had an absolute shocker.
Darby was hired as the third chief executive in less than a year after the company issued three profit warnings.
It plunged £433 million into the red for the six months to the end of September due to asset write downs, weak sales, competitive pressures and George Osborne’s cuts to public sector spending.
Anyone who has followed the chequered history of the Cable & Wireless businesses will know it’s an all too familiar story. Darby doubtless knew about it too when he was hired to take on the role before Christmas.
That’s probably why he secured a change of ownership clause in his contract, which entitles him to get the equivalent of his base salary of £600,000 for a year, whether or not he gets a new job at the company.
He also got a so-called golden hello of £600,000 worth of shares and a further £300,000 in shares to match his purchase of the same amount as part of a package that could be worth as much as £3.3 million.
He joins a long list of Cable & Wireless executives that have enjoyed handsome pay deals.
Doubtless he’d like to stay and see the turnaround job through but he’ll have noted too that Vodafone is not the only firm eyeing up his new company. Private equity group Apax is also said to be interested, according to reports.
My guess is that C&W Worldwide would be worth far more to Vodafone because of the cost savings it could generate. But as mentioned, if Colao did make a move it would be filled with risk.
Few executives seem to have managed to get a real handle on C&W Worldwide. Its former chief executive John Pluthero did for a while, appearing to turn the company around a few years back, but the bad habits and the economy eventually caught up with it again.
Unpicking the business would be a knotty task for Colao and his team and, given C&W Worldwide’s history of mistakes, who knows what skeletons they might find in there.
But at around £1 billion, it would not be the biggest chunk of change a Vodafone CEO had ever spent on an acquisition, and if there were any write-downs later on, at least they wouldn’t be too embarrassingly large.
A more expensive and risky option for Colao would be to make a bid for troubled BlackBerry maker Research inMotion. There is no evidence that he is preparing to, but it would certainly be fun to watch.