Or will the largest investor in Cable & Wireless Worldwide block the deal?
Cable & Wireless Worldwide (LSE: CW), an erstwhile value portfolio losing play, is the subject of a 38p agreed bid from Vodafone (LSE: VOD). An agreed bid means that it has been accepted by the target's directors, as distinct from the hostile bids that occur sometimes where the acquirer proceeds in the face of opposition from the target's board.
In this case, CW directors own only a minuscule fraction of the shares -- in fact, so small that it is almost invisible at 0.09%. Much more importantly, therefore, other holders amounting to almost 19% of the issued capital have indicated their agreement to the bid.
The offer document containing the exact timetable has not yet been issued, so I don't know when the cash will be paid out -- assuming the bid succeeds -- but a reasonably conservative guess might be around, say, four months from now. 'Well, so what', you might ask.
Is the price right?
The point is this: CW is trading, as I write, at about 34p per share. This means that, with the takeover price at 38p, there is an automatic 4p gain less buying costs. There are no selling costs with bids like this -- the whole price is received by the shareholder without deduction.
I'll try and make it a bit more realistic. £10,000 would buy 29,228 shares of CW at 34p, totalling about £9,938. Add in the 0.5% stamp duty and £12 brokerage, and the total comes to the above. In due course, Vodafone will pay out £11,107, making a profit of £1,169 or 11.8% in the four months, equivalent on a simple interest basis to 35% per year. That's not a bad return by value standards or any standards.
It's a bit of arbitrage, defined as taking advantage of different prices that happen to occur sometimes in the markets. Here, we have likely 38p against a significantly lower current market price.
Most people, though, are bound to ask how come this is happening -- surely, such a wide price difference should never have arisen precisely because arbing by investors ought immediately to eliminate any such tendency? And it is an excellent question.
Mind the price gap
If this were cut and dried, as certain as it gets, the only price discount should be that attributable to the interest cost of tying your money up for the period concerned. CW has suspended dividends, so such payment in the period is not the explanation. Is this the free lunch thought by many to be a mere chimera? A complementary meal that, far from mythical, has always been available to those prepared to travel the difficult road of the dedicated value investor. Few are, so they don't eat.
The reason for the price gap is the degree of uncertainty surrounding the bid, owing primarily to the view of the largest investor in CW -- fund manager Orbis with some 19% -- being unhappy with the price offered by Vodafone. Apparently, they built up their stake over the last 10 years, which takes them well back to the days of the old Cable & Wireless before it split into two new companies about two years ago. Subsequently, with the collapsing price of CW, sources say that they increased their holding a lot further and it stands now at an average of 56p. Clearly, then, at 38p they would take a big hit.
In order for the bid to proceed, Vodafone has to obtain at least 75% of the CW shareholders vote at a meeting that has not yet been arranged, as far I know. Orbis has not said it will vote against the offer, but it could block the deal if insufficient CW shareholders actually bother to vote. It is this possibility, I believe, which has created the price discount.
Potential risk vs reward
The question for value players is one of potential risk against reward. Is the potential reward of this arb better than the risk of the bid failing? No clear answer can be given because, although we know the exact profit that would be made if successful, we don't know the odds of the bid failing.
My gut feeling, and it is only that because I haven't got much else to go on, is that this bid will succeed. But it has to be accepted that this is not without risk. What you have to ask yourself also is what would happen if it fails, bearing in mind that the bid price is some 100% over the pre-bid price. It could easily fall back to those levels of well under 20p, and then you'd either have to take the hit or decide to hang on for potential longer-term recovery or perhaps another future bid.
Note that I think this is only worth it, if you go for it at all, while the CW price is around the current figure I quote above or lower. Any worthwhile amount higher, though and I'd avoid because the arb margin would then be too low in my view for the risk. Once the bid becomes near certain by the shareholder vote, then naturally the price discount is likely to evaporate.
An interesting one, though, and a different proposition from the usual type of value play.
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> Stephen holds shares of Vodafone.
