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Vodafone is in the early stage of evaluating the benefits of a potential offer and is not sure whether the bid will take pace. If the deal proposed, it will likely be in cash. According to the Times of London, Vodafone is considering an offer of £700 million ($1.1 billion) to buy Cable & Wireless.
Over the next few years, mobile data expansion will be the key growth driver for both Vodafone and the industry at large. The company is accelerating its investments in faster networks to boost smartphone sales and increase data traffic.
Vodafone is way ahead of its competitors in upgrading the 3G and HSPA+ networks. The launch of 4G Long Term Evolution services in Germany in 2010 was a huge success. Vodafone plans to launch the LTE network in Spain and Italy in the short term. We believe ongoing efforts to upgrade the existing network infrastructure should result in higher average revenue per user, higher minutes of use and improved operating margins through greater network efficiency.
The prospect of mobile data is better in emerging markets with the expected mobile penetration rate of 70% compared with 130% in mature markets. Given the rising demand for Internet on cell phones, the potential Cable & Wireless deal would provide more data access to smartphones customers.
Vodafone has a March 12 timeline to make an offer for the acquisition. The company will have to drop the bid, should it fail the deadline, under British takeover rules.
Coupled with successful smartphone and data services, Vodafone is looking for further expansion in the emerging markets of Eastern Europe, India and Africa through new growth strategies and exiting minority holdings to boost liquidity, free cash flow and shareholders’ return.
However, persistent revenue declines in southern European operations, regulatory pressure, stiff competition from larger rivals like Verizon Communications ( VZ - Analyst Report ) and AT&T Inc. ( T - Analyst Report ) , and reductions in mobile termination rates pose major threats to the stock.
We are currently maintaining our long-term Neutral recommendation on Vodafone. For the short term (1–3 months), the stock retains the Zacks #4 (Sell) Rank.
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