Mobile phone group Vodafone has agreed to buy Cable & Wireless Worldwide (CWW) for 1.04 billion pounds ($1.7 billion), giving it a British fixed-line network to relieve the strain on its wireless operations from data-hungry smartphone users.
The world's biggest mobile phone operator by revenue said on Monday buying corporate telecoms specialist CWW would make it a leading player in both fixed-line and mobile telecom services to Britain's businesses, and it could make cost savings by using CWW's networks, both in the UK and internationally.
"There is a good overlap between Cable & Wireless' fibre network and our base stations which will significantly reduce the cost to us of managing the growth in data traffic," Vodafone Chief Executive Vittorio Colao said in a call with analysts.
He said the deal would make Vodafone the second largest telecoms supplier in the UK after BT, and would double the size of its enterprise business in Britain, which serves companies.
"This positions us very well to capture the growth demand for unified data services in enterprise," he said, referring to companies' demand for both fixed-line and mobile services.
Vodafone is offering CWW shareholders, who have had a torrid time since the group split from the former Cable & Wireless in March 2010, 38 pence a share in cash, a 92 percent premium to the price before it declared its interest in February.
CWW has issued three profit warnings, had the same number of chief executives and has suspended its dividend since it split.
Vodafone can use CWW's 20,500 kilometres of fibre cables to shift data from its wireless network, which is under strain as more and more people use data-hungry smartphones. The mobile giant currently rents fixed lines for such capacity - a process called backhaul - from the likes of CWW and BT.
The deal also boosts Vodafone's enterprise business with the addition of contracts to provide voice, data and hosting services to British government departments and companies, and it gains CWW's international cable network.
India's Tata Communications was also in talks to buy CWW, but withdrew last week when the two sides could not agree on a price. It was said to have indicated it could offer 35 pence a share.
Shares in CWW were 14.2 percent higher at 36.5 pence by 0937 GMT, reflecting shareholders' relief that a bid had materialised after Vodafone was granted three extensions by Britain's takeover panel. Vodafone's shares were broadly flat.
"It's positive for Cable & Wireless because there was still some scepticism in the market whether Vodafone would bid at all, particularly after Tata stated it was unlikely to bid," said Espirito Santo analyst Nick Brown.
He said Tata could re-enter the race, but thought it was unlikely to at this price level. "They would be unable to compete if Vodafone did enter a bidding war," he said.
Robin Bienenstock at Bernstein said Vodafone was increasingly focused on fixed lines because it needed backhaul capacity as next generation wireless technology rolled out and it targetted business with companies.
"The UK is a good place to test this strategy as so much UK wireline business is concentrated in the hands of BT and given that Vodafone has a strong business brand here," she said.
Vodafone's offer, which CWW said was "fair and reasonable", is backed by shareholders holding 18.6 percent of CWW's stock.
Analysts had said Vodafone could use some of CWW's losses to offset some of its tax bill, but Vodafone said it did not believe it could utilise the tax losses.
CWW's history stretches back to the middle of the nineteenth century, when it laid a telegraph cable between London and Dublin. Links between Britain and India, the Caribbean, Asia, Australia and the United States followed.
The group ran into trouble, however, within months of its demerger from Cable & Wireless Communications in 2010, a deal engineered by former chief executive John Pluthero, who pocketed more than 10 million pounds in bonuses from the business.
Pluthero returned as chief executive of CWW in June 2011 but left within six months after the group posted a 433 million pounds half-year loss.
CWW's shares have plunged from a high of 98.5 pence when it listed to a low of 13 pence in November 2011, as it blamed a faster-than-expected drop in voice revenue, intense competition in data services and government cutbacks for its woes.
UBS is acting as sole financial adviser to Vodafone. Barclays and Rothschild are acting as joint financial advisers to CWW.