While no agreement has been reached and terms of the deal haven't been hammered out, analysts say such a stake would fetch more than $4bn (£2.43bn). People familiar with the discussions say Cable & Wireless Chief Executive Graham Wallace spoke Tuesday with Microsoft's chief financial officer, Greg Maffei, but that the completion of a deal isn't imminent. Microsoft and Cable & Wireless both declined to comment.
The UK, with its advanced cable systems, has become a major battleground for companies seeking to supply technology for a host of new services delivered over cable, including telephone service, interactive television and high-speed Internet access. A Microsoft competitor, Network Computer Inc., had taken the lead, signing deals to supply set-top box and server software to all three of the major U.K. cable providers, including the Cable & Wireless unit. NCI's largest shareholders are Microsoft's archrivals, Oracle Corp. and America Online Inc.
But Microsoft is increasingly using its huge cash hoard, which is growing at the rate of about $2bn a quarter, to secure key customers for its software. In February, Microsoft paid $500m for a 5 percent stake in NTL Ltd., another big cable operator in the U.K. As part of the deal, NTL agreed to use Microsoft's set-top software in addition to NCI's.
Earlier this week, Microsoft agreed to invest $600m in wireless operator Nextel Communications Inc., in return for Nextel's commitment to use the Microsoft Network for its Web-phone online service, and drop a previous agreement with AOL's Netscape Netcenter unit. Last week, as part of its $5bn investment in AT&T Corp., Microsoft gained a commitment from the U.S. long-distance phone and cable giant to use Microsoft's Windows CE software in as many as 10 million television set-top boxes.
If Microsoft can close an investment in Cable & Wireless Communications PLC, the carrier's cable-TV unit, it will have equity stakes in all three of the top U.K. cable operators. Last week, as part of its broad deal with AT&T, Microsoft agreed to swap stock for the 29.9 percent stake in Telewest Communications PLC that is held by MediaOne Group Inc., which agreed to be acquired by AT&T. AT&T had earlier valued the Telewest stake at as much as $3.5bn, but Microsoft paid considerably less, according to a person familiar with the deal. Terms weren't disclosed. Microsoft hasn't yet reached a technology agreement with Telewest.
If it takes a stake in the Cable & Wireless unit, Microsoft will likely be a major player in the continuing consolidation of the U.K. cable business. Cable & Wireless has been in talks about merging the residential assets of its cable-TV unit with Telewest. Microsoft's plan to take a minority stake in CWC is part of those merger discussions, said people familiar with the situation.
Microsoft executives believe overseas cable holdings are undervalued compared with cable systems in the U.S. At the same time, the U.K. cable business is viewed as a testing ground for the suite of services that are only in the planning stages in the U.S. Cable companies in the U.K. are already equipped to offer telephone service, high-speed Internet access and electronic commerce.
While U.S. cable companies sprung up in the 1970s, the U.K. cable business is much newer, an advantage especially when it comes to the Internet. U.K. cable companies use fibre-optic networks, giving them the capability to offer digital television and data services.
But few, so far, have exploited the Internet. Microsoft expects Internet access to be more television-driven in the U.K. By making an investment in the cable networks, Microsoft hopes to be positioned to be the software provider when Internet use explodes in the U.K.