Surprise move puts vast Indian conglomerate in direct competition with Vodafone, which announced its interest in Cable and Wireless Worldwide last month
India's vast salt-to-software conglomerate Tata is mulling a bid for Cable and Wireless Worldwide (CWW), setting the stage for a bidding war for the troubled London-listed telecoms group.
The surprise move puts Tata in direct competition with Vodafone, which announced its interest in CWW last month. Analysts at broker Sanford C Bernstein said an acquisition could be valued at up to £900m, or 33p a share.
A successful bid by Tata would be the biggest British acquisition by an Indian firm since sister company Tata Motors bought Jaguar Land Rover for $2.3bn (£1.4bn) in 2008. The Indian conglomerate is also the owner of Tata Steel, which bought the UK steelmaker Corus in 2007.
CWW has performed miserably ever since it split from the Caribbean-focused Cable & Wireless Communications in March 2010.
The company has fixed telephone lines that can be used to relieve pressure on mobile networks, and provides voice, data and other services to major British firms such as Next, Tesco and United Utilities.
But it has been hit by the recession and an unstoppable decline in phone calls. A string of profit warnings has led to several management changes, with John Pluthero stepping down as chief executive in November.
The shares crashed to a low of less than 15p at the end of last year.
Nick Brown, analyst at Execution Noble, said: "Because they've gone through so many profit warnings and the share price is so depressed, there's been a lot of people looking at the company seriously, because they may be able to pick it up at a lower price."
He said CWW's management team has considered splitting up and disposing of the assets, but may be willing to accept a lower price for the whole company because of the pressure it has been under recently.
News of the bid interest drove shares higher and they closed up 15% at 33p, valuing the company at £877m.
Any bidder will have a tough time persuading shareholders to accept an offer, as many of the largest investors bought into the company at a relatively high price. One of the top three investors is thought to have paid an average price of 40p for its shares.
Tata was a surprise entrant to the race. Brown said: "I don't think many people were expecting a bid from them. Tata is not a name that has come up before."
He said other network providers, such as AT&T in the US, private equity groups such as Apax, or tech companies HP and IBM could also be interested in CWW.
"If we do get a formal bid from Tata," he added, "it might mean that Vodafone have to pay more if they want the asset. They can justify a higher premium because of the synergies."
Vodafone is thought to be interested in CWW's telephone lines, as it seeks to bolster its network to cope with the explosion of internet traffic on mobile phones.
Tata said it was at a "very preliminary stage" of evaluating a possible cash offer for CWW, and that it was "part of its ongoing review of potential acquisitions".
CWW has an international cable network connecting more than 150 countries, as well as five offices and 150 customers in India, which analysts said could be of particular interest to Tata Communications. It is thought the acquisition would strengthen Tata's position as a global provider of undersea fibre-optic cable and business communications.
But analysts remained perplexed. Brown said: "It's not clear what Tata would want to do with the UK asset, apart from diversify away from their Indian operations."
There is some concern that Tata would have to take on too much debt to secure a bid, when its balance sheet is already stretched. The Indian group, which has a market cap of $1.4bn, already has leverage of 4.1 times, according to Thomson Reuters data.
Tata Communications may be further restricted from bidding too aggressively for CWW, as it is part-owned by the Indian government and has posted losses in the two years to March 2011.
Under Takeover Panel rules Tata must clarify its intentions by 29 March, while Vodafone has until 12 March.