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Vodafone considers offer for Cable & Wireless Worldwide

Move worth up to £700m comes as company seeks to bolster network to cope with growth of internet traffic on mobile phones

Vodafone has confirmed that it is considering a cash offer for Cable & Wireless Worldwide, with the offer believed to be worth up to £700m.

The offer for Britain’s second largest fixed line telecoms network comes as Vodafone seeks to bolster its network to cope with the explosion of internet traffic on mobile phones.

Shares in CWW surged 31% to 25p in early trading, reflecting the premium that Vodafone is thought to be considering. The company was worth £526m on Friday after a series of profit warnings slashed the share price by 70% over the last 12 months.

“Vodafone regularly reviews opportunities in the sector and confirms that it is in the very early stages of evaluating the merits of a potential offer for CWW,” the firm said in a statement. “Any offer, if made, will be in cash, but Vodafone reserves the right to change the specie of consideration.”

Vodafone’s shares nudged up 0.9% to 174p. With the growing popularity of smartphones and tablets, the volume of internet traffic over mobile phones has surged, forcing Vodafone and other mobile operators to rent miles of backhaul – the cables that connect mast networks to the internet – from BT Group and CWW.

“Vodafone already pays the likes of CWW for backhaul in any case, so they can offset that saving against the purchase price,” Mark James, a telecoms analyst at the broker Liberum Capital, said.

The volume of data traffic on the UK’s mobile networks increased 40-fold between 2007 and 2010, according to the telecoms watchdog Ofcom, and the mast builder Ericsson forecasts it to grow 10-fold around the world by 2016.

Vodafone already owns miles of cables in other European countries including Germany, where it continues to expand its fixed line network.

However, the move into acquisition mode marks a shift in strategy by the Vodafone chief executive, Vittorio Colao, who has spent his three and a half years at the head of one of the world’s largest mobile operators slimming it down by selling minority stakes in overseas operators.

“These guys are incredibly gun-shy about mergers and acquisitions and if this gets into a bidding war they are likely to back away,” Robin Bienenstock, an analyst at the broker Sanford Bernstein, said.

“This is a management team that rehabilitated itself by selling things and making it clear they were interested in shareholder value after a series of wildly expensive acquisitions binges by previous chief executives.”

Under Colao’s predecessor, Arun Sarin, Vodafone invested billions in an Indian network and under former chief executive Sir Chris Gent became known as one of the most aggressive British acquirers of overseas assets. Its acquisition of Germany’s Mannesmann in 2000 set a record as the largest corporate deal in history.

Vodafone has until 5pm on 12 March to make a firm offer or withdraw. Other groups that could take an interest in CWW’s assets include the private equity firm Apax Partners, which is investing in telecoms and recently bought the Orange network in Switzerland.

Virgin Media could be attracted to CWW’s corporate client base, having vowed to grow its business services division at a faster rate than the rest of the company over the coming years.

Were CWW to be broken up for auction, it could be worth more than the price being considered by Vodafone.

Investec Bank recently put the break-up value of CWW at £2.5bn, saying its UK network and customer base could be worth £1bn, its data centres £350m, its network of global subsea cables £650m and a further £500m for accumulated losses which can be used to reduce tax bills.

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