Cable and Wireless has made an informal offer for Thus, a smaller telecoms rival.
C&W’s approach, made on Wednesday, could lead to much-needed consolidation among telecoms providers serving companies rather than consumers.
Richard Lapthorne, C&W’s chairman, held talks in London with Philip Rogerson, his counterpart at Thus, about the indicative offer.
Thus shares rose 28½p to 138½p, valuing it at £253m ($501m), after C&W confirmed its approach. C&W fell 4½p to 158.7p.
C&W said it had made a “preliminary approach to the board of Thus in relation to a possible offer”. C&W is interested in Thus’s customer base, which includes Scottish Power and Johnston Press.
Thus responded by saying it was “confident in its future as an independent group, which offers an attractive combination of strong growth and future cash flow generation”.
C&W’s UK operations are midway through a turnround that is based on serving companies rather than consumers. Its UK operations have been in decline since C&W lost its fixed-line duopoly with BT in 1991, but last week the group reported significant progress with the turnround.
C&W said its UK operations would be cash flow positive in 2008-09, adding that revenue growth had been restored in the second half of 2007-08.
C&W had net cash of £243m on its balance sheet at the end of March, and John Pluthero, head of UK operations, signalled he was willing to consider acquisitions.
Thus, which was spun out of Scottish Power and floated in 1999, last week reported a maiden operating profit of £4m for 2007-08. It generated revenue of £576m, up 8 per cent.
Neil Rickard, an analyst at Gartner, said C&W would gain valuable scale by combining with Thus, allowing it to compete better with BT, its biggest rival.
“The main advantage for C&W is scale,” he added. “This is a positive step in competing with BT.”
At least 15 fixed-line telecoms providers are serving UK companies, and they are struggling with fierce price competition.
Thus’s shares have fallen more than 40 per cent in the past year, and Jonathan Groocock, analyst at Investec, said that C&W’s approach was “opportunistic”.
Mr Groocock said the company might be able to justify paying a 30 per cent premium for Thus, or 180p a share. That would give Thus an enterprise value of about £360m.
He estimated that C&W, by combining with Thus, could achieve savings of £30m to £40m in capital and operating expenditure, and so boost core earnings by £20m to £30m.
However, Mark James, an analyst at Collins Stewart, said the company should return cash to shareholders rather than buy Thus.
C&W coy about demerger plans
At its 2007-08 results last week Cable and Wireless was coy about the timing of an eagerly awaited demerger of its UK and international operations, writes Andrew Parker.
The C&W management declined to confirm that its plans would be set out at the company’s interim 2008-09 results in November.
Simon Weeden, an analyst at Goldman Sachs, said a C&W move to buy Thus, a smaller rival, should not cause a “material delay” to any demerger.
Lawrence Sugarman at Dresdner Kleinwort said that if the company finalised a deal with Thus it should still be able to work towards a demerger announcement at the interim results.
Many investors expect a demerger to take a classic format.
C&W’s shareholders would get two shares: one in its UK operations and another in the international businesses.
But some investors think C&W could make disposals among its 33 international businesses.
The most attractive businesses are likely to be those in the Caribbean, where C&W has been competing with Digicel, the telecoms company run by Denis O’Brien, the Irish tycoon.
America Movil, the leading Latin American mobile phone company, is also entering the Caribbean. Carlos Slim, the Mexican billionaire, controls America Movil.
C&W’s management has been incentivised to prepare for a demerger through the company’s long-term incentive plan.
The plan could pay out more than £20m to John Pluthero, head of the UK and international operations.