Cable Operators

NTL and Virgin Engage In Four Play

4/07/2006 8:00 PM Eastern

NTL Inc., the largest cable operator in the United Kingdom, last week sent a shot across the bow of its largest rival — direct-broadcast satellite giant British Sky Broadcasting Group Ltd. — with its agreement to purchase wireless carrier Virgin Mobile in a deal valued at about $1.7 billion.

NTL, which only completed its $6 billion acquisition of No. 2 British cable operator Telewest Group plc on March 6, has been negotiating with Virgin Mobile for months — it made its initial offer, rejected by Virgin Mobile as too low, in December. The transaction, expected to close in June, will give NTL a strong wireless component to its existing bundle of voice, video and high-speed data and further differentiate it from BSkyB, which currently does not have a wireless play.

NTL-Virgin Mobile
Shareholders of Virgin Mobile have three options in the proposed NTL deal:
Source: The companies
Accepting all cash: $6.53 per share
Accepting all stock: 0.23245 shares of NTL stock for each Virgin Mobile share, valued at $6.83 per share
Accepting a combination of cash and stock: 0.18596 shares of NTL stock for each share of Virgin Mobile plus $1.18 in cash with a total value of $5.46 per share.

VIRGIN REBRANDING

Perhaps more importantly, NTL said it will eventually rebrand all of its offerings — cable, wireline voice and high-speed data — under the Virgin name, giving it a powerful, well-known brand to compete against BSkyB. According to NTL research, Virgin is the No. 1 brand in the U.K.

“We believe this could shift the dynamic in the U.K. communications market in NTL's favor, given opportunity to re-approach customers with a new respected brand and product offering,” wrote UBS cable debt and equity analyst Aryeh Bourkoff in a research note.

Oppenheimer & Co. analyst Tom Eagan also saw the merger as a positive for both companies.

“Strategically, we expect the combined company to be more competitive in the long-term,” Eagan wrote in his research note.

NTL said it has a 30-year licensing agreement with U.K. media mogul Richard Branson's Virgin Group Investments Ltd. — which also owns 71.2% of Virgin Mobile — to use the Virgin name on existing and new products.

NTL will pay Virgin Group 0.25% of its total consumer revenue annually for that right, which works out to about $15.8 million, based on 2005 sales. Virgin Group also will own about 10.6% of the combined company after the deal closes.

In a conference call with analysts on April 4, NTL chairman James Mooney said that the rebranding process probably won't begin until year-end, noting that integrating Telewest's operations into NTL is the first priority. But he added that adopting the Virgin name will be a powerful weapon against BSkyB.

“This will reposition NTL in the U.K in the minds of customers,” Mooney said on the conference call. “We can use it to challenge our large incumbent competitor.”

Although NTL is the largest cable operator in Britain, counting about 5 million video customers, BSkyB is the largest pay TV operator with 8 million video subscribers.

BSkyB has also been making moves to help it compete against NTL's triple play of video, voice and data: It acquired U.K. broadband service provider EasyNet in October for $373 million to allow it to offer high-speed Internet and voice services. With the addition of Virgin Mobile, which has about 4.3 million wireless customers, NTL could possibly close that gap.

RETAIL HOME

As part of the deal, NTL will be able to sell its quad-play offerings through Virgin Mobile's more than 100 “stores within stores” at retail outlets like Virgin Megastores and WH Smith.

Virgin Mobile shareholders will have the option of accepting cash, stock or a combination of both. If they opt for cash, Virgin shareholders would receive about $6.53 in cash for each of their shares.

The all-stock option would involve 0.23245 shares of NTL for each Virgin Mobile share, valued at about $6.83 per share. The cash and stock option would include 0.18596 NTL shares and $1.18 in cash for each Virgin share, with a total value of $5.46 per share.

Virgin Mobile will also receive a seat on NTL's board of directors. While the company hasn't picked that person yet, Mooney said it is unlikely that it will be Branson.

September