Japanese Bid Going Haywire, Cable & Wireless Confronts Other Options

Its bid to acquire the No. 2 Japanese long-distance firm may well fail, but that needn't set back the British telecom outfit.
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LONDON -- Japanese protectionism makes for great headlines. Yet the specter of government intervention in International Digital Communications' rejection of Cable & Wireless' (CWP) buyout offer threatens to make the prospect that the bid will fail seem much more damaging than it is.

On Wednesday, C&W increased its bid for Japan's second-largest long-distance carrier, in which it holds a 17.7% stake, after the board of IDC recommended that shareholders reject C&W's offer in favor of a complex and as-yet-unlawful offer from government-owned

Nippon Telegraph & Telephone

(NTT)

.

A spokesman for C&W told

TSC

that presentations to IDC's major shareholders, including

Itochu

,

Toyota

(TOYOY)

and

Airtouch

(ATI) - Get Report

, have generated "considerable interest." C&W remains tight-lipped about the details but some indications are the new offer could be worth as much as 100 billion yen.

Please Don't Hang Up

With figures as high as this being bandied about, it is apparent that this is one battle C&W desperately wants to win.

IDC would play an integral part in C&W's new, but as yet unstated, strategy to focus on global data services for business customers, by using the Japanese carrier as a major strategic hub for its Asian international telephone network.

Bagging IDC would also improve sentiment among C&W shareholders, whose patience with the company is wearing thin. Since the beginning of this year, C&W's share price is up only 4.9%, compared with 10.3% for

Primark Datastream's

U.K Telecom Index and 7.3% for the

FTSE

blue-chip index. At midday in London, C&W was up 3.1% at 840 pence.

One of C&W's problems is that it has tried to be all things to all people. It is rather a mixed bag of businesses including cable and telephone operations. This lack of focus led to changes in management, and a new CEO, Graham Wallace, was appointed earlier this year. He is expected to articulate his vision for the company at the annual shareholder meeting on May 12.

Not the End of the Line

The high-profile nature of this attempted acquisition has pushed it from the business pages to the front pages. Yet a failure to acquire IDC is likely to be only a minor, albeit high-profile, setback.

C&W initially made an all-cash bid of 62.4 billion yen for IDC, which was countered by NTT with a cash-and-share offer worth about 63 billion yen. The trouble with NTT's offer is that the legislation necessary to allow share-for-share offers is not expected to pass the lower house of parliament until October.

Despite this minor sticking point, the board of IDC voted in favor of recommending NTT's offer, which inevitably provoked cries of protectionism from C&W and the British government has promised to look into the issue. The Japanese government declared itself to be "neutral" on the issue, something that is viewed with a great deal of suspicion because it happens to be the majority shareholder in NTT.

"This deal is not the be-all and end-all the headlines are making out," says Justinian Clifford-Bowles, an analyst at

Commerzbank

.

Indeed, there are a number of favorable scenarios and alternative avenues C&W could explore.

If it decides to equal C&W's new bid, NTT could then offer to tie-up with C&W in the international market in order to resolve the bidding war before it gets out of hand. C&W would subsequently get a higher price for its IDC shares and gain entry to the Japanese market, while NTT would benefit from having a quick solution in the international market and gain some know-how from C&W.

Alternatively, C&W could take its money in IDC and run. Part of the new legislation expected to go before Japan's lower house in October will include a squeeze-out provision, whereby a company that garners, say, 90% of the shares in a takeover battle can force the holders of the remaining 10% to sell.

If NTT wins the bidding war, it would probably force C&W to sell its stake. C&W could then take this money and invest it in

KDD

, Japan's largest long-distance carrier, which is currently looking for a partner. C&W could also look to invest in an environment less fraught with government interference.

A victory for NTT aided and abetted by the government would provide a clear example of how closed Japan's telecom market remains. But the barbarians are still at the gate:

AT&T

(T) - Get Report

and

British Telecom

(BTY)

are reportedly preparing to take a combined 30% stake in

Japan Telecom

.