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VOD, Cable & Wireless Deal Extended

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British mobile phone giant Vodafone Group Plc (VOD - Free Report) has granted an extension until March 29 to make a potential bid for the acquisition of Cable & Wireless Worldwide Plc.

The same deadline was given to Tata Communications Ltd , which also showed interest in acquiring Cable & Wireless early this month. Tata Communications has hired Standard Chartered plc as its financial adviser for evaluating the benefits of the offer.

Last month, Vodafone disclosed its intention to acquire Cable & Wireless for £700 million ($1.1 billion). If the deal is proposed, it will likely be in cash according to the Times of London. The company will have to drop the bid, should it fail the deadline, under British takeover rules.

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 over the short term. We believe the 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 an 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.

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 strategiesand by 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 - Free Report) and AT&T Inc. (T - Free 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 a Zacks #3 (Hold) Rank.

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