Shares in Cable & Wireless Communications (C&W) jumped nearly five per cent in one day to 658 pence following reports that Microsoft intended to take a 30 per cent stake in the UK cable leader.
While both sides were refusing to comment on the potential tie-up, it was reported that Graham Wallace, chief executive of C&W, met with Greg Maffei, chief financial officer of Microsoft on 11 May. The reports caused C&W's share price to soar the following day.
Although the transaction is not expected to be imminent, analysts believe such a stake in C&W would be worth about $4 billion.
The move comes swiftly on the heels of Microsoft's 29.9 per cent stake in the UK's second largest cable group, Telewest Communications (PC Dealer, 12 May). The software giant has already secured a $5 billion investment deal with AT&T, under the terms of which Microsoft won a commitment from the US telco to use its Windows CE operating system in 10 million TV set-top boxes.
Telewest and C&W are already in merger talks, and with Microsoft's five per cent stake in number three player, NTL, industry watchers believe the vendor will broker a deal between the three to speed the consolidation of the market.
Microsoft's interest in the UK cable industry comes from its belief that the cable holdings are undervalued compared with those in the US. UK cable firms also use fibre optic networks that enable them to offer consumers digital TV, data and telephone services, and high speed internet access, although few have exploited these capabilities.
Microsoft hopes to secure itself in the position of leading software provider when the internet takes off in the UK.
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