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3 Reasons Why C&W Is a Good Fit for Vodafone

Cable & Wireless Worldwide's interim update confirms Morningstar's fears but it would still be a good fit for Vodafone

Holly Cook 17 February, 2012 | 11:02AM

Cable & Wireless Worldwide's (CW.) interim update this week confirmed some of Morningstar's fears, but the introduction of a new CEO and the possibility of a Vodafone (VOD) takeover propose a rosier future for the U.K.'s second-largest telecom firm.

"We think there are a number of British companies that want to see a significant competitor to BT Group (BT.A)", Morningstar's Allan C. Nichols wrote in his analyst note following Thursday's management update, adding that this will help C&W through the difficult times evident in its update. Nichols is very pleased to see former-CEO John Pluthero leave and incoming CEO Gavin Darby acknowledge some of the problems and begin to address them.

Regarding Vodafone's announcement this week that it is in talks to buy C&W, Nichols said he has long believed the latter would fit nicely into Vodafone and listed three key reasons. Firstly, Vodafone has acquired fixed assets in several European countries but does not yet have any fixed assets in the U.K.; secondly, Vodafone is also focusing more on building its corporate business, which C&W's customer relationships would help; and thirdly, the acquisition would lower Vodafone's costs as it could move much of its backhaul from BT's network to its own.

The market valued C&W at around £530 million at the close on Friday Feb. 10, before reports of Vodafone's potential offer emerged, though the shares have rallied 38% in the past five days, valuing the company at closer to £740 million. Though Vodafone warned on Monday Feb. 13 that there is no certainty that an offer will be made, brokers were already talking of cash bids in the region of £700-£900 million.

Morningstar's Nichols recently slashed his long-term fair value estimate on C&W by 25% and noted that the stock had plummeted more than 80% in the preceding 15 months. At Nichols' fair value estimate, C&W shares are currently marginally undervalued, hence their 4-star Morningstar rating.

Morningstar Premium Members gain exclusive access to our full Cable & Wireless Worldwide and Vodafone Analyst Reports, including fair value estimates, bull and bear breakdowns, and risk analysis. Not a Premium member? Get these reports immediately when you try Morningstar Premium free for 14 days.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Holly Cook

Holly Cook  is Managing Editor of Morningstar.co.uk

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