Vodafone's CWW offer could effect Verizon relationship

01 March 2012 | Richard Irving

How does Vodafone’s opportunistic tilt at CWW leave its high-maintenance relationship with Verizon?

Of all the questions to emerge since the mobile phone giant reluctantly confirmed last month that it is weighing up a £750 million bid for Cable&Wireless Worldwide (CWW), the impact of a deal on its tortuous on-off relationship with Verizon must surely count among the more perplexing.

Relations between Vodafone and Verizon have been gently thawing ever since the US carrier agreed to lift a ban blocking the payment of dividends from Verizon Wireless, a joint venture between the two telecoms giants. When incoming chief executive Lowell McAdam took the helm at Verizon last year, he handed over a £2.8 billion dividend cheque to Vodafone, silencing a swathe of increasingly disgruntled shareholders who had begun to question the benefits of the venture in the first place. To further cement relations, he went on a 50-mile bicycle trip with his counterpart at Vodafone, the fun-loving Italian Vittorio Colao, thus drawing to a close a troubled spell during which relations between the two companies had been decidedly frosty, if not outright combative.

Then Fran Shammo, Verizon’s CFO, suggested late last year that the dynamic between the two carriers had moved from a financial partnership to a strategic relationship as he announced a new sales joint venture. The venture, more than three and a half years in the planning, is targeting multi-national companies and offers a range of products and services across a fixed-line/mobile platform including a suite of Verizon’s cloud-based solutions.

Adding further fuel to the fire was a note from Goldman Sachs, the US investment bank, floating the possibility that Verizon might eventually sell off its fixed-line operations and merge its wireless and enterprise units with Vodafone.

It is the way of things at both Vodafone and Verizon to dampen any speculation of a merger between the two behemoths and few analysts expect a move in the short term. But tellingly, neither company will rule out the prospect and efforts to push ahead with initiatives targeting the enterprise market suggest that the ability to offer multinational companies a comprehensive fixed-line and wireless service could prove the foundations of any future tie-up.

None of this sits well with Vodafone’s interest in CWW. Clearly price is an issue. On the day before Vodafone confirmed its interest, CWW shares were trading some 80% below their price at the time of the demerger from Cable & Wireless in 2010. Even assuming Vodafone pays £1 billion for the business – a near £500 million premium to CWW’s value ahead of the news leak – the mobile operator would scoop a portfolio of assets which Investec, a London-based investment boutique, estimates is worth almost two and a half times that.

CWW’s UK fibre network, the largest in the county, could well be worth £1 billion on its own: factor in another £650 million for its international network, including 425,000km of undersea cable, and another £350 million for its data centre business, and it starts to become clear why the bargain-loving Colao might make CWW his first major acquisition since taking the helm.

Much has been made of CWW’s impressive customer list, which includes no fewer than 70% of the UK’s top 100 listed companies and a slew of government organisations including the police and the Foreign & Commonwealth Office.

Vodafone, meanwhile, has made little secret of its intention to beef up its global enterprise unit, which serves around 560-plus multinational companies including Unilever, Bosch and Hewlett Packard and is growing at the rate of 8% a year. The company does not break out earnings, but it is widely thought to be targeting revenues of £10 billion a year or more over the next few years. The question is whether Vodafone can hold good on that ambition while it is seen by some enterprise customers to be predominantly a mobile play. As Telefónica has shown, piecing together fixed-line and mobile services can pull in some very hefty enterprise contracts.

In this respect, CWW’s network infrastructure is vital, helping quench Vodafone’s thirst for bandwidth as it drives growth by encouraging customers to consume more and more data. The network would also reduce Vodafone’s need to rent capacity off BT, cutting a big chunk of operational costs from the bottom line. But if CWW’s fixed-line network is the jewel in the crown, then it must surely raise questions over Vodafone’s highly public commitment to develop a fixed/mobile combined service platform with Verizon.

While the balance of power in the Verizon/Vodafone relationship undoubtedly appears to be shifting towards the UK, Colao’s reputation will stand or fall on his ability to unlock value from Vodafone’s complex relationship. It will be for Colao to judge whether that new-found entente cordial is worth risking for a tempting bargain this side of the Atlantic.