Vodafone agreed to acquire Cable & Wireless Worldwide (CWW) for 1.04 billion pounds in cash, valuing CWW at three times EBITDA. The deal propels Vodafone to the second largest telco in the UK with revenues of GBP6.97 billion, behind BT with revenues of GBP15.6 billion. From a financial perspective, the deal has a limited impact, accounting for only 3% of Vodafone’s 2011 EBITDA. However, given BT’s lack of a mobile division, Vodafone, becomes the leading integrated telco in the UK, offering fixed and mobile operations. The deal is expected to complete in Q3 2012.

The main focus of the deal is on CWW’s UK fixed-line network and CWW’s business customer base, both of which Vodafone aims to add to its UK mobile network. CWW provides managed voice, data, hosting, and IP-based services and applications. The deal boosts Vodafone’s enterprise offering, both in terms of access and transport infrastructure and also in terms of customer base. CWW is a major global infrastructure player: Its international cable network spans 425,000 km in length, covering 150 countries. In the UK, CWW operates a 20,500 km fiber network. Moreover, CWW has about 6,000 business customers. The future of CWW’s non-UK assets remains uncertain. In our view they do provide true value for Vodafone, strengthening its global network infrastructure. Vodafone will provide further details regarding these non-UK assets later in the year.

The deal also addresses the demand for convergent solutions. Vodafone — in our view correctly — believes that fixed network infrastructure remains important in future, not least due to bandwidth-hungry applications such as UCC. The deal aims to leverage CWW’s assets for a converged portfolio. The deal strengthens Vodafone’s convergent and cloud-based communications (UCaaS) and hosting solutions. Vodafone already provides these types of solutions to the low-end of the market via its ONE Net offering. Thanks to the deal, Vodafone aims to go to the higher-end of the market. Its strategy in this space is to build up the capabilities to provide convergent and cloud-based communications solutions on an international scale and then decide market-by-market where to focus geographically.

The deal is a sign that the market for mid-sized telcos is getting tougher. Scale and synergies increasingly matter. The deal offers complementary network and data center assets and will trigger savings opportunities by reducing the cost for managing data traffic. For instance, Vodafone maintains about 13,000 base stations in the UK. About one-third of CWW’s 20,500 km UK national fiber network runs within 100 meters of these base stations, which could be linked to the CWW network. Given that most of Vodafone’s base stations in the UK are managed under a leasing arrangement, there will be significant savings. In addition, Vodafone expects savings through procurement, IT consolidation, and administration.

Vodafone pursues a two-stage approach to integration. During the initial phase, Vodafone intends to keep CWW separate, but under senior Vodafone management. During this phase, the enterprise account teams will be merged. During this first phase, Vodafone will also have to invest in CWW’s network (although exact investment intentions were not communicated). During the second phase, Vodafone will fully combine the network infrastructure. Vodafone Group will be in charge of global customers, but regional accounts will be integrated on a national basis.

The deal will increase competition for BT, O2, and Everything Everywhere as Vodafone becomes the undisputed full-service telco in the UK. However, at this stage, there is no obvious reason why the deal should undermine the mobile virtual network operator (MVNO) partnership Vodafone has with BT.

The implications of the deal could have far reaching implications. Verizon, parent of Verizon Wireless, in which Vodafone maintains a 45% stake, and Vodafone might move closer to another in the enterprise space.

The deal is also interesting in that it underlines the limits of mobile broadband infrastructure for UCC and cloud computing. The explosion of data traffic driven by multimedia solutions like UCaaS requires a powerful global fixed network infrastructure, not only for the backhaul. It’s time to take network infrastructure into account when designing cloud-based information and communications technology (ICT) solutions.