>TATA COMMUNICATION’s acquisition of Tyco and Teleglobe in FY06 has not been very encouraging

UW: TCOM taking the M&A route

TCOM is evaluating cash offer for CWW according to reports
Potential synergies would be about cost rationalizations, capex savings and vendor consolidation
We remain UW and maintain target price of INR205



■ Newsflow suggests TCOM is close to making a formal cash offer to acquire Cable
and Wireless Worldwide PLC (20 March 2012, Wall Street Journal). The move is in
line with our thesis that TCOM will have to raise capex given revenue growth challenges.
In the broader context this move needs to be seen in the larger overseas acquisition
strategy of the Tata Group (which has yielded mixed results – Corus not much success yet
while JLR has had a successful turnaround). Vodafone has also stated that it is evaluating
the merits of a potential offer.


■ CWW (CW/LN, UW(V), 37.35p, target 27p) is a low margin business offering managed
voice and data, with more than 75% of its group revenue exposure in the UK, and the bulk of
the remainder serving UK corporate outside the UK. We have an UW(V) rating on the stock
given the structural decline in voice revenues, commoditization of data connectivity and
pricing pressure from BT, under-investment and an overall challenging business environment.


■ We value CWW at cUSD1bn (P/B 0.8x, stock traded at an average P/B of 0.9x over the
last 12 months) and as such believe payout for CWW above our fair value could be
negative for TCOM. Assuming the deal goes through, CWW’s EBITDA would account
for c70% of total EBITDA and as such the swing factor would be CWW margin
expansion (without any material change to capex/sales ratio). In our view potential
synergies will be largely from cost rationalization, capex savings and vendor
consolidation. CWW has substantial tax assets with USD5.2bn of UK Capital Allowances
and USD25.6bn of tax losses (March 2011). But with limited details we are unable to
compute to what extent TCOM could benefit from this.


■ TCOM’s acquisition of Tyco and Teleglobe in FY06 has not been very encouraging.
TCOM’s revenue has grown at CAGR of c7% during FY07-11 and EBITDA CAGR
during the same period has been c8% (both adjusted for Neotel). Improvement in network
and transmission cost witnessed in FY08 were attributed to realization of synergies from
the acquisitions of Teleglobe and TGN. However, the improvement was temporary as the
subsequent increase in ILD revenues wiped the benefits.


■ Valuation. We continue to value TCOM on a DCF-based SOTP approach. We value the
core business at INR75/share, surplus land at INR97/share, and investments in TTSL at
INR33/share. We retain our UW rating on the stock and target price of INR 205. Upside
risks for the stock include the ability to benefit from global consolidation and higher-than estimated margin expansion at Neotel.


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