The trouble with taking contrarian positions is that sometimes it can feel a bit lonely.
When I first tipped Cable & Wireless Communications (CWC) back in 2013, the firm was on a terrible run. Since splitting from its parent company in 2010 it had lost about 30% of its share price, and had consistently disappointed investors.
But I thought CWC was a good fit for New World readers. It was embarking on an ambitious plan to turn a disparate hotch-potch of international assets into a regional telecoms player in the Latin American and Caribbean market. Moreover, because it was UK-listed, it gave an easy, cheap way for small private investors like us to get access to the fast-growing Latin American demand for mobile phones, internet and data.
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Well, since I first wrote about it, the share's up 28%. Not bad for little over a year's work. But that's just the start. Ten days ago the firm announced a link-up with one of America's biggest media moguls. It's a move that finally realises CWCs dream of becoming a regional telecoms player.
What's more, having this shrewd investor on our side suddenly makes my position feel a lot less lonely. Let me explain
Darth Vader' strikes back
When I heard that John Malone was partnering with CWC I was delighted. A short look at his record shows that he knows a thing or two about the media and communications business. He might be America's number one landowner, but Malone actually made his money in cable TV. His Liberty Media and Liberty Global corporations own a range of televisions channels, bookshops and radio stations across the world. And while he is more famous in the US, he has also made some splashes in Britain, buying up Virgin Media for £15bn and taking a stake in ITV.
Of course you don't get that powerful without making some enemies, and it's clear that Malone is not everyone's cup of tea. He's repeatedly crossed swords with Rupert Murdoch after the Australian feared that Malone was trying to take control of News Corporation. His battles with US regulators also led to him being dubbed Darth Vader' by former vice president Al Gore. A quick Google search reveals an impressive array of other nicknames: the Cable King, Swamp Alligator' and, my favourite, the Cable Cowboy'. I guess they all show that this is a man that provokes a strong reaction. But given that he is unlikely to invite me for tea anytime soon, I'm not too fussed about his personality.
The real question for us is: why is one of America's sharpest businessmen suddenly taking an interest in our investment?
Why Malone is suddenly interested in CWC
CWC is buying Columbus International a Barbados-based provider of cable TV, broadband and telephony to around 700,000 customers across the region for £1.9bn.
Now, if CWC was simply buying the firm from Malone, I'd be worried. That's because his record shows that when he sells you something, he's normally getting the better deal. But the move actually makes them partners. CWC will only pay £446m in cash. The rest will come through a shares deal that will see Malone take a 13% stake in the new, larger CWC. Initially the market was negative, as shareholders fretted about the plans to part fund the deal with a 10% share placement. But since then the prices has recovered as investors start to see the positives.
The reason that I liked CWC in the first place was because I believed in its plan. The firm was looking to do two things increase the amount of money its existing customers spend, and expand to new countries in the region. Now this surprise move with Malone looks to do both in one fell swoop. It doubles in size, gains an entry to important new markets, such as Colombia, and can now offer a much more complete offering to customers. Moreover the assets that Columbus brings to the party such as its own fibre optic network would help CWC's ability to offer more data-heavy services.
The right company at the right time
CWC's plan isn't just being well executed it's also benefiting from great timing. I've written about this before but there are several wider factors that will push Latin American telephony, media and internet consumption over the next few years. And that will benefit the new CWC.
Latin America's use of smartphones, the internet and data-heavy social media sites is rocketing. Ok, you'd expect that with any emerging region, but in Latin America the trend is really strong. Over the last five years Latin America has been the world's fastest growing internet region. And luckily for CWC it looks set to continue. Internet penetration in Latin America currently sits at about 40%, compared to almost 80% in the US. Analysts expect that penetration will reach 60% by 2015.
Another great factor for CWC is how Latinos use the internet. Social media is incredibly important, with Latin American users spending an average of ten hours on social media per month, compared to a global average of five hours. Indeed the region is home to five of the world's top ten biggest users of social media per capita. Sharing videos and photos requires lots of data to be stored and sent, which is a great way for CWC to get more money from its customers.
Given all of the above, you can see why I'm optimistic on CWC. Moreover, with a dividend yield of 5.5% we can earn good money while we're waiting for the company to finish executing its plan and for the factors above to kick in.
If you bought in on my first tip hold and if you haven't done so yet consider getting in now.
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