British mobile phone giant Vodafone Group Plc (VOD) expects to incur costs worth £500 million ($809 million) over the next four years for the integration of Cable & Wireless Worldwide. The company acquired Cable & Wireless Worldwide in July this year for £1.04 billion.
The deal is part of Vodafone's future growth strategies that hinge on five components. It includes increasing mobile data services, enlarging growth in enterprise segments, expanding growth in emerging markets including Eastern Europe, India and Africa, growing in new areas and maintaining liquid investment in quality networks.
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. Further, Vodafone aims to establish a differentiated network across all its regions through a combined focus on quality networks, IT and partners network sharing.
The Cable & Wireless acquisition would enhance its enterprise business, leading to strength in mobile, fixed and cloud services. Given the rising demand for Internet on cell phones, the deal would provide high-capacity fiber network to offload streaming video and other bandwidth services from the mobile network. As a result, this would minimize the company's need for additional capacity that it takes on lease from third parties such as BT Group plc (BT), thereby lowering costs.
Overall, the transaction will bring in high network integration benefits with quantifiable cost savings. The merger is expected to deliver cash flow synergies of £150-200 million per year by March 2016 on full integration with free cash flow of £250-300 million in March 2016.
We are maintaining our long-term Neutral recommendation on Vodafone. The stock retains a Zacks #3 (Hold) Rank for the short term (1-3 months).