London -- Last week's purchase of Cable & Wireless
Communications plc's (CWC) residential-broadband assets by NTL Inc. gives that
company the muscle to shake new life into the British cable market.
With a bigger-than-expected $5.5 billion helping hand from
France Telecom S.A., NTL is now the country's largest MSO. It controls more than half
of all U.K. cable households and more than two-thirds of urban households, NTL CEO Barclay
Knapp told analysts in a conference call.
NTL's unprecedented scope makes it a much stronger
competitor for direct-to-home platform British Sky Broadcasting Group plc (BSkyB) and
telco British Telecommunications plc.
NTL agreed to pay £8.2 billion ($13 billion) for the CWC
properties, including £1.9 million ($3 billion) in assumed debt. The acquisition boosts
its subscriber base by 1.2 million homes to 2.9 million homes. That price, CIBC World
Markets analyst Aryeh Bourkoff noted, converts into a whopping $10,892 per subscriber and
$3,042 per home passed, on par with U.S. valuations of $3,000 to $3,250 per home passed.
The hefty price comes in a market where subscribers pay a
minimum of $45 per month for service. During the conference call, Knapp said NTL is
"very comfortable." with the price and will concentrate on boosting penetration
levels and operating performance at CWC.
Janco Partners Inc. analyst Ted Henderson said while the
price tag is "daunting," low penetration levels in the U.K., and the ability to
sell integrated services including telephony, provide more upside potential than markets
such as the U.S.
The purchase "vaults us into the number one position
in the U.K. and realizes the dream we started with in 1993 -- to be the strongest force in
competitive local telephony," Knapp said.
Analysts have long speculated that the U.K. will end up
with just one major MSO. Knapp said NTL has an "open hand" toward Telewest
Communications plc, the country's other big MSO. Earlier this year Telwest had
entered into its own discussions with CWC, before it was edged out by NTL.
"Full consolidation on appropriate terms would be
positive," said Knapp. "We are ready, willing and able."
However, Knapp said NTL must first close the CWC
acquisition, which is expected to happen in about six to eight months, before a deal with
Telewest can materialize. Analysts speculate that Microsoft Corp., whose stake in NTL will
decrease to 3 percent from the current 5 percent as a result of the deal and which has
agreed to buy 29.99 percent of Telewest from MediaOne Group Inc., could be a catalyst in
an NTL-Telewest merger.
"We believe Microsoft has a unique interest in
bringing Telewest and NTL together and rolling up its interest in Telewest into NTL, given
its increased scope and scalability," Bourkoff wrote in a research memo.
At the same time, Knapp said NTL will push ahead with
digital and interactive services. Its wide reach over U.K. households will also help it
attract content partners.
He also said NTL's size could result in a better
relationship with BSkyB, the dominant supplier of programming to the British cable
industry. "Cable is going to be a great distribution platform for their content, so
there'll be benefits for them in concentrating on the customer-supplier relationship
rather than the competitive relationship," he said.
France Telecom's investment in NTL is well above what
was expected and will give the company an immediate 18 percent stake in the MSO and three
of 12 seats on the company's board. France Telecom's stake could rise to as much
as 34 percent of NTL after 2002.
The investment in NTL is a departure for France Telecom,
which has not been a particularly aggressive player in Europe's consolidating cable
However, "England is the largest telecom market in
Europe after Germany," said France Telecom president Michel Bon. "The British
market was deregulated well before the others ... That is why, in contrast to what we are
doing in other European countries, I always thought we should proceed via [major]
Added France Telecom CFO Jean Louis Vinciguerra: "The
cable business in the U.K. is a unique opportunity in Europe to combine TV and Internet
services. We think there are significant earnings potential and growth
Bell Atlantic Corp. of the U.S., which owns 18.6 percent of
CWC, last week approved the NTL deal. As a result, it will receive an 8 percent interest
in NTL and 4.7 percent of CWC parent Cable & Wireless Communications plc.
Mike Galetto contributed to this story.