Does Vodafone's Bid Hit The Target?

Published in Investing on 10 May 2012

Or will the largest investor in Cable & Wireless Worldwide block the deal?

Cable & Wireless Worldwide (LSE: CW), an erstwhile value portfolio losing play, is the subject of a 38p agreed bid from Vodafone (LSE: VOD). An agreed bid means that it has been accepted by the target's directors, as distinct from the hostile bids that occur sometimes where the acquirer proceeds in the face of opposition from the target's board.

In this case, CW directors own only a minuscule fraction of the shares -- in fact, so small that it is almost invisible at 0.09%. Much more importantly, therefore, other holders amounting to almost 19% of the issued capital have indicated their agreement to the bid.

The offer document containing the exact timetable has not yet been issued, so I don't know when the cash will be paid out -- assuming the bid succeeds -- but a reasonably conservative guess might be around, say, four months from now. 'Well, so what', you might ask.

Is the price right?

The point is this: CW is trading, as I write, at about 34p per share. This means that, with the takeover price at 38p, there is an automatic 4p gain less buying costs. There are no selling costs with bids like this -- the whole price is received by the shareholder without deduction.

I'll try and make it a bit more realistic. £10,000 would buy 29,228 shares of CW at 34p, totalling about £9,938. Add in the 0.5% stamp duty and £12 brokerage, and the total comes to the above. In due course, Vodafone will pay out £11,107, making a profit of £1,169 or 11.8% in the four months, equivalent on a simple interest basis to 35% per year. That's not a bad return by value standards or any standards.

It's a bit of arbitrage, defined as taking advantage of different prices that happen to occur sometimes in the markets. Here, we have likely 38p against a significantly lower current market price.

Most people, though, are bound to ask how come this is happening -- surely, such a wide price difference should never have arisen precisely because arbing by investors ought immediately to eliminate any such tendency? And it is an excellent question.

Mind the price gap

If this were cut and dried, as certain as it gets, the only price discount should be that attributable to the interest cost of tying your money up for the period concerned. CW has suspended dividends, so such payment in the period is not the explanation. Is this the free lunch thought by many to be a mere chimera? A complementary meal that, far from mythical, has always been available to those prepared to travel the difficult road of the dedicated value investor. Few are, so they don't eat.

The reason for the price gap is the degree of uncertainty surrounding the bid, owing primarily to the view of the largest investor in CW -- fund manager Orbis with some 19% -- being unhappy with the price offered by Vodafone. Apparently, they built up their stake over the last 10 years, which takes them well back to the days of the old Cable & Wireless before it split into two new companies about two years ago. Subsequently, with the collapsing price of CW, sources say that they increased their holding a lot further and it stands now at an average of 56p. Clearly, then, at 38p they would take a big hit.

In order for the bid to proceed, Vodafone has to obtain at least 75% of the CW shareholders vote at a meeting that has not yet been arranged, as far I know. Orbis has not said it will vote against the offer, but it could block the deal if insufficient CW shareholders actually bother to vote. It is this possibility, I believe, which has created the price discount.

Potential risk vs reward

The question for value players is one of potential risk against reward. Is the potential reward of this arb better than the risk of the bid failing? No clear answer can be given because, although we know the exact profit that would be made if successful, we don't know the odds of the bid failing.

My gut feeling, and it is only that because I haven't got much else to go on, is that this bid will succeed. But it has to be accepted that this is not without risk. What you have to ask yourself also is what would happen if it fails, bearing in mind that the bid price is some 100% over the pre-bid price. It could easily fall back to those levels of well under 20p, and then you'd either have to take the hit or decide to hang on for potential longer-term recovery or perhaps another future bid.

Note that I think this is only worth it, if you go for it at all, while the CW price is around the current figure I quote above or lower. Any worthwhile amount higher, though and I'd avoid because the arb margin would then be too low in my view for the risk. Once the bid becomes near certain by the shareholder vote, then naturally the price discount is likely to evaporate.

An interesting one, though, and a different proposition from the usual type of value play.

Searching for dependable FTSE dividend shares? This free Motley Fool report -- "8 Shares Held By Britain's Super Investor" -- reveals the major companies favoured by high-yield legend Neil Woodford.

Further investment opportunities:

> Stephen holds shares of Vodafone.

Share & subscribe

Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

gillerz960 10 May 2012 , 4:58pm

I've never done this before but your article did give me an idea. What if you were to short CW. and buy Vod?

If the deal goes through CW. goes up and you lose out on 10% or, but Vod should go up as well as I think the deal would be a very good price for them, and I think it is a great company and so you may lose out on that short term trade but the risk is limited.

If the deal doesn't go through then the short on CW. should pay out nicely, and you will see a drop in Vod but not too much.

Any thoughts?

ANuvver 10 May 2012 , 6:42pm

Surely the arbitrage differential encapsulates the risk that C&W shareholders (many of whom will take a hefty hit even on the offer price) will play tough on the deal and Vodafone will walk away. In that event you could be looking at a lot of downside from 34p...

Such a high potential reward makes me suspect that the arb desks regard that risk as uncomfortably high. AFAIK they tend to prefer smaller margins with better odds.

HousingBear999 11 May 2012 , 12:11am

Is it 75 per cent of shareholders overall who need to pass the resolution, or just 75pc of those who turn up to vote? I must admit I'd believed it was the latter, but could well be wrong (does a takeover situation maybe make it different to a "normal" shareholder vote).

pyad 11 May 2012 , 10:49am

I've never done this before but your article did give me an idea. What if you were to short CW. and buy Vod?

If the deal goes through CW. goes up and you lose out on 10% or, but Vod should go up as well as I think the deal would be a very good price for them, and I think it is a great company and so you may lose out on that short term trade but the risk is limited.

If the deal doesn't go through then the short on CW. should pay out nicely, and you will see a drop in Vod but not too much.

Any thoughts?


For two reasons I don't see this trade as sensible. First if the bid succeeds then your CW. short is a sure loser but I see little reason for VOD to rise much at all just for this reason, let alone by enough to compensate for the CW. loss. The acquisition is fairly small for VOD and if anything the usual trend is for bidder's shares to fall, not rise.

If the bid fails, then yes you'll probably score well on the CW. short but again I see little effect on VOD for this reason alone.

So it's not in my view this will make money only if the bid fails, not in both situations which is what you wanted to achieve.

Is it 75 per cent of shareholders overall who need to pass the resolution, or just 75pc of those who turn up to vote? I must admit I'd believed it was the latter, but could well be wrong (does a takeover situation maybe make it different to a "normal" shareholder vote).

It's 75 per cent of those voting. I'd guess they don't need to turn up but will be able to vote by proxy as usual.

kempiejon 11 May 2012 , 11:20am

I thought this too. pre bid announcement my buy average 55p hu the price was in the 20s. Then with agreement of 38p suggested ther price was still at 33p I bought some more. There are some risks and you don't have to make it back in the same share but I share some of stephens views on risk and return and time scale on this one.

I have a much larger VOD holding and a friend suggested I sell some VOD to buy CW at below 34p for 10% and then move the profit back into more VOD. That's outside my style though.

gbjbaanb 11 May 2012 , 3:46pm

You've got to consider the longer term implications if Orbis doesn't agree to it and the bid fails - the SP will undoubtedly fall back to 20p or so giving Orbis a much bigger loss than otherwise. They would be only interested if another bid was lurking, and considering the only other one (Tata) was offering less than 38p, I doubt this will happen.

So would CW. be able to grow the business to double its SP? I seriously doubt that too. So, I guess Orbis is trying to shake things up a little, but will give in to the only logical position they have, and accept the offer.

Afrosia 11 May 2012 , 6:18pm

A special resolution is required. I'm pretty sure that is 75% of shareholders, not just those who turn up to vote, otherwise an Orbis "No" vote would be certain to can the acquisition.

Afrosia 11 May 2012 , 6:20pm

I tell a lie. It is only those turning up to vote!

jackdaww 13 May 2012 , 9:04am

stephen

"A complementary meal"

is that the right word ??

i wont be buying/shorting CWW - just adding to vodafone.

if the bid succeeds so much the better.

TRhere 17 May 2012 , 2:25pm

If the takeover is structured as a Scheme of Arrangement then it needs 75% of shareholders who vote to approve it. But provided the Takeover Panel agrees Vodafone could switch the structure to a simple bid, which would ony require a simple majority. So my guess would be they'd do that if they weren't sure they had 75% in the bag.

bouleversee 23 May 2012 , 6:32pm

You don't have to turn up to vote. You can fill in the voting cards or vote on line and presumably if you don't hold your shares in certificated form you can ask your broker to vote on your behalf. As I understand it, your vote will be counted however you vote so worth making the effort.

Like Orbis, I have held some of my shares for a long time and topped up IIRC after Pyad had recommended them in his value P/F (LOL) so will be losing a lot. Also losing a packet on another of his value favourites, Aviva. I doubt I shall live long enough to see that supposed value outed, but while there's life there's hope.

Join the conversation

Please take note - some tags have changed.

Line breaks are converted automatically.

You may use the following tags in your post: [b]bolded text[/b], [i]italicised text[/i]. All other tags will be removed from your post.

If you want to add a link, please ensure you type it as http://www.fool.co.uk as opposed to www.fool.co.uk.

Hello stranger

To add your own comment, please login.

Not yet registered? Register now.