Liberty Media Corp. chairman John Malone is getting closer to snapping up the remaining interest in Telewest Communications plc, after the U.K. cable provider said it was contemplating a debt-for-equity swap.
Telewest has been trying for months to pay down its $8.1 billion in total debt. Although the company has enough cash to continue its operations for the rest of the year, it is finding it more difficult to figure out a way to significantly reduce its leverage.
Liberty initiated a tender offer for Telewest bonds on June 12, offering to pay as much as $350 million in cash for up to 20 percent of the company's $4.2 billion in bond debt. As of July 10, Liberty — which already owns about 6.3 percent of Telewest debt — had received tenders for about 17 percent of the bonds.
Liberty also has a 25 percent equity stake in Telewest.
Telewest, the second-largest cable operator in the U.K. behind bankrupt NTL Inc., said in a July 4 letter to shareholders that it was in the company's best interest to enter into discussions with Liberty and a group of its bondholders, who have approached Telewest about "participating in some form of restructuring of its balance sheet."
The letter said that no specific proposals had been discussed with bondholders yet. Janco Partners cable analyst Matt Harrigan believes that a debt-for-equity swap is likely.
"That's certainly what people are contemplating," Harrigan said. "The assumption is that it wouldn't have to be as drastic as the NTL situation, because Telewest has always met its numbers.
"They would probably need to take out a third of the debt, but it isn't the basket case that NTL was where you had to equitize the entire public debt."
The anticipation follows a July 3 Securities and Exchange Commission filing by Microsoft Corp. — Telewest's other large equity partner — in which the software giant disclosed that it's seeking to sell its 23.6 percent stake in the U.K. cable operator to Liberty for $330 million.
Microsoft paid $3 billion for the stake in July 2000. Liberty has 30 days to decide whether to purchase all of the shares, or none of them. In the event that Liberty declines to buy the shares, Microsoft would sell them on the public market.
Gaining control of Telewest would give Liberty a foothold in one of the most lucrative television markets in Europe, and would serve to heal the wounds the company suffered in its failed attempt to dominate the German pay TV market.
Liberty's bid to purchase the German cable assets of Deutsche Telekom AG for $5.8 billion was squashed by German regulators.
Liberty also owns about 76 percent of UnitedGlobalCom Inc., a Denver-based operator with about 10 million cable subscribers in 14 countries in Europe. Worldwide, UGC reaches 18.9 million homes in 26 countries.
While Malone attempts to gain control of Telewest, some bondholders are seeking to block Liberty's tender offer for the MSO's debt. They claim that because Liberty already has three seats on Telewest's board of directors, it would have undue influence over the tender offer.
Telewest already has said that Liberty's three Telewest board members — Robert Bennett, Miranda Curtis and Graham Hollis — would be barred from any restructuring discussions.
The bondholder objections were expected, Harrigan said, mainly because many of the same investors also held NTL bonds, which Malone unsuccessfully tried to buy earlier this year.
"I don't think there is any love lost [between Telewest bondholders and Malone]," Harrigan said. "It doesn't surprise me that they would try to throw some stones at Liberty. I think ultimately, Malone will succeed in getting control of a fair amount of the bonds."
Most analysts expect Malone to combine Telewest with NTL, which is in the middle of its own restructuring. NTL filed for Chapter 11 bankruptcy protection in May, proposing to split into two separate companies: NTL Europe and NTL U.K. and Ireland.
Although Telewest has some balance-sheet issues of its own, acquiring the U.K. MSO would be a good move for Liberty, Harrigan said.
"The balance sheet probably does have to be addressed, but it's the nearest miss of all the cable MSOs over in Europe," Harrigan said. "Their brand equity is higher and they are much closer to being fully funded than NTL or [UnitedGlobalCom] were.
"There is some possibility that they might not run out of cash until the middle of next year. I think Liberty should come out of this fairly well."
Harrigan said that any combination of NTL and Telewest wouldn't occur for at least 12 to 18 months.
"The endgame is that everyone wants there to be a merger between NTL and Telewest," Harrigan said. "The issue, is who's going to have control over it.
"Liberty's ultimate endgame could be keeping control of Telewest and trying to get control, or at least have a disproportionate equity interest in the combined company," he added. "Liberty's objectives don't coincide with the bondholder group. You can't really get a deal done until the NTL restructuring closes and people figure out what happens to Telewest."
By combining NTL and Telewest, Liberty would control about 4.5 million subscribers in Britain, thus affording it better leverage against News Corp.'s British Sky Broadcasting Corp., the largest pay-TV provider in the U.K, with 5.9 million subscribers.