Demerger to buoy Cable & Wireless

Investors have been eagerly anticipating the demerger of Cable & Wireless' two businesses - communications business and Worldwide and mobile telecoms business, CWI. That move, which is due to be completed by end-March 2010, will see Cable & Wireless' shareholders receive one share in CWI and one in Worldwide for every Cable & Wireless share held at the completion of the demerger.

The reason for the excitement reflects the expectation, reiterated by a range of sector analysts, that the separation and subsequent listing of the two businesses will release value. Indeed, analysts at broker Barclays Capital estimate that, on a sum-of-the-parts basis, CWI and Worldwide could be worth £1.9bn and £2.6bn, respectively. That, according to the broker, suggests a target share price of around 175p - already well above the existing share price. What's more, that estimate could turn out to be on the conservative side should either of the businesses get taken over.

And takeover activity is certainly a possibility. After all, the UK-based Worldwide operation serves the telecoms needs of big corporates and competes with such players as BT, France Telecom and AT&T. It could prove to be an especially attractive addition for any main rival looking to bolster market share. Meanwhile, the CWI business serves both consumers and companies in regions such as Monaco, the Caribbean and Macau and, in many of these markets, it boasts a fixed-line monopoly with only limited competition from local rivals. It is also worth remembering that, historically, around 65 per cent of recent UK demergers have led to the assets involved being subsequently acquired.

Cable & Wireless is certainly working hard to prepare for the demerger. In particular, the group will put in place new debt facilities - with £500m of new funding for Worldwide and $1bn (£0.62bn) for CWI. What's more Worldwide will have no debt maturing within three years of the demerger, which should further add to its attraction as a bid target. It is also envisaged that the split will involve an equal division of Cable & Wireless' admittedly hefty pension deficit which, at the half-year stage, stood at £305m. Management has yet to agree the details with pension scheme's trustees, although £75m worth of top-up funding has already been committed.

But Cable & Wireless isn't just a demerger story. Quite apart from the split, there should be strong growth opportunities ahead from a steady rise in higher margin non-voice-based revenues. These include such activities as data and hosting services and these currently generate more than half of the group's revenues. This offering has been significantly bolstered through 2008's acquisition of Thus - integration efforts there are ahead of schedule and cost-saving targets look set to be exceeded. Indeed, analysts at broker Nomura expect synergies of £104m; £14m higher than originally anticipated.

Although the group has faced trading pressures in regions where activity is more tourist-led, such as the Caribbean. In fact, at the half-year stage, revenues there fell 10 per cent year-on-year, as the weaker global economy meant lower visitor numbers and reduced visitor spend. Still, such sluggishness should diminish as wider economic recovery becomes more entrenched.

What's more, such regional trading weakness shouldn't detract from the dividend attractions. Unlike plenty of companies, Cable & Wireless managed to avoid cutting its dividend as the recession took hold, and management expects to pay out a 6.34p final dividend, taking the full-year expected dividend for 2010 to 9.5p and making for an impressive prospective dividend yield of nearly 7 per cent. That's far more compelling than at rivals BT or Vodafone - based on brokers' consensus estimates, the prospective yields for that pair stand at a more modest 5.1 per cent and 5.6 per cent, respectively.