Vodafone covers all bases with C&WW buy

Vodafone is set to acquire Cable and Wireless Worldwide (C&WW) following a recommendation from C&WW’s board to its shareholders that they accept the £1.04 billion (€1.2 billion) bid from the UK-based mobile operator.

 

C&WW’s assets will help Vodafone fill gaps in its telecommunications portfolio, while the purchase price is the best C&WW could have hoped for. It’s certainly considerably higher than the bid rumored to have been on the table from Tata Communications, which pulled out of the running last week.

 

The acquisition adds to Vodafone’s revenue potential from global services by significantly increasing the number of addressable enterprise customers worldwide, giving it access to substantial international network systems and relationships that C&WW built up over many years. However, we see Vodafone facing an uphill route to profit. Most carriers find it difficult to integrate complementary telecoms service portfolios, networks, and business processes. Vodafone will have to make numerous tough decisions to build a competitive global services business, and the operator has yet to prove it can make such difficult choices.

 

With its money on the table, Vodafone must now act decisively to minimize its risk. However, the risks associated with developing its global services business will be substantially offset by the cost and efficiency savings it anticipates garnering in the UK and internationally.

 

The deal, which still has to be approved by C&WW’s shareholders, will make Vodafone the second-largest telecoms service provider in the UK based on each company’s last reported year of revenues, behind BT and ahead of Everything Everywhere. It will also make Vodafone the only owner of next-generation fixed and mobile networks in the UK, a position of strength it must exploit to minimize costs and increase efficiency while building enterprise revenue.

 

In statements to analysts and press, Vodafone’s chief executive, Vittorio Colao, stated that C&WW’s fiber goes within 100 meters of a third of all Vodafone’s base stations and that the company would “edge towards” digging to the base stations.

 

Owning one’s own fiber backhaul capacity has considerable efficiency and financial benefits. AT&T claimed that connecting HSPA+ base stations with fiber increased data throughput speeds by 35% over HSPA+ on the air interface alone. Furthermore, if C&WW fiber goes that close to Vodafone’s base stations it will also be close to those of the other mobile operators. Vodafone can look at offering backhaul either on a wholesale basis or through backhaul-sharing options such as the one it has with Deutsche Telekom in Germany, especially when UK operators roll out LTE.

 

 

With demand for backhaul growing exponentially, BT and the country’s altnets are looking to ride that wave. As things stand, Vodafone buys backhaul from BT, and BT uses Vodafone as the host operator for its enterprise mobility solutions, so it’s complementary rather than competitive. Colao claims that the relationship will remain positive, even suggesting that his first call would be to BT.

 

However, having its own national fiber network will fundamentally change the balance of power between Vodafone and BT in Vodafone’s favor. Unlike their previous relationship, the two companies would compete directly for Vodafone’s business and for wholesale contracts from other fixed and mobile service providers.

 

On an international basis, Vodafone has the potential to provide the C&WW network with its own very significant anchor client. Like its European competitors Deutsche Telekom, FT-Orange, Telefonica, and Telecom Italia, the Vodafone Group’s own retail businesses deliver economies of scale that benefit themselves and their customers.

 

As mobile data (and voice) drives the vast majority of growth in international traffic, the change of role for Vodafone is significant. Vodafone has the largest international footprint of any mobile operator, so what it does with its traffic counts. This does not mean that Vodafone will switch all of its international traffic to C&WW’s network at the completion of the deal. Competitor carriers will continue to carry Vodafone traffic going forward. However, the combined negotiating power of C&WW’s and Vodafone’s carrier business will affect everything from voice termination and IP peering to SLAs and VAS requirements.

 

Like the UK’s fiber providers, Vodafone’s international carriers should brace themselves for tougher negotiations and stiffer competition.