NTL Builds Arsenal Via $6B Deal for Telewest

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NTL Inc. has agreed to purchase Telewest Global Inc. in a $6 billion deal that will solidify its position as the No. 1 cable operator in the United Kingdom and give it more firepower in its competitive duel with the largest pay-TV provider in the country, British Sky Broadcasting Group plc.

The deal will boost NTL’s video subscriber base to about 3.3 million in the U.K., bringing it closer to direct-to-home satellite provider BSkyB’s 7.8 million subscribers. More importantly, it will solidify NTL’s leadership in broadband and telephony customers.

BUNDLE BOOST

In addition to 3.3 million video subscribers, the new NTL will have 2.5 million broadband customers and 4.3 million telephone customers.

The British cable powerhouse will pay about $23.93 per share for Telewest — $16.25 in cash and 0.115 shares of NTL stock for every Telewest share. As a result, Telewest shareholders will own about 25% of the equity in the combined company.

Talk of an NTL-Telewest merger has been rampant for most of the year, especially since Telewest emerged from bankruptcy protection in 2004. Earlier this year, Telewest quietly put Flextech plc, its programming arm, on the block — a move many analysts believed was a precursor to an NTL deal. In the past, NTL executives said they had no desire to own content.

That attitude changed as the bids started to come in for Flextech — Time Warner Inc., Discovery Holding Co., Viacom Inc. and British programmers ITV, RTL Inc., BSkyB and Sparrowhawk Media were all said to have made bids. And while analysts had valued the programming assets as high as $1.4 billion to $1.9 billion, the bids apparently didn’t reach that level, and Telewest pulled the programming unit off the market late last month.

Flextech is the largest single provider of TV channels in the U.K. — it owns 10 channels outright and is a 50-50 partner with the British Broadcasting Corp. in UKTV, which owns another 11 channels.

In a conference call with analysts discussing the merger, NTL CEO Simon Duffy said that while he has said that NTL had no desire to be a content company, there are exceptions.

Duffy pointed to BSkyB, which has used exclusive content — mainly English Premier League soccer matches — “as a strategic weapon” to drive subscriber additions. Coupled with free services like Freeview, which offers 30 free channels to customers who buy a box that connects to their TV and antenna for about $100, content ownership becomes more compelling.

“In that match game, not to have access to or strategic control over such a high-quality and high-caliber content business as Telewest’s content business … would be crazy,” Duffy said.

In an interview with the Manchester Guardian, Duffy said NTL is contemplating making a run at a package of Premiership matches extending from 2007-10 for some 200 million pounds annually, should the European Commission rule that no single broadcaster can bid for more than 50% of the matches.

But Duffy also left the door open to selling a portion of the content unit.

“One hundred percent ownership is a possibility, strategic partnership with other channel owners is a possibility, which could mean a partial sale to other channel owners,” Duffy said on the call. “What is probably not on the table is an auction for the highest price, regardless of who’s paying the check.”

Analysts generally liked the deal, which they said gives the combined company more heft and positions it better against competitors BSkyB and Freeview. Pro forma combined revenue for the 12 months ended June 30 would have been $5.97 billion and operating cash flow would have totaled $2.1 billion.

“While execution risks exist, this creates a powerful platform with significant scale and vertical integration,” UBS Warburg cable debt and equity analyst Aryeh Bourkoff wrote in a research note.

NTL expects to extract about $2.6 billion in cost synergies from the merger, mainly by optimizing both companies’ networks and eliminating duplicative activities. It is also expected that some employees will lose their jobs, but no figure has been announced yet. NTL currently has about 10,000 employees. Telewest has about 8,400 workers.

Duffy and chairman James Mooney will keep those roles in the combined company. Telewest chairman Anthony (Cob) Stenham will become deputy chairman of the new NTL.

Telewest acting CEO Barry Elson will leave the company after the deal is completed, expected in the first quarter of 2006. Telewest chief operating officer Eric Tveter has agreed to stay on until the end of 2006 to help in the transition.

REVVING UP ROLLOUTS

Mooney added that the combined company will have more resources to roll out advanced services like video on demand, HDTV and voice-over-Internet protocol telephony across its footprint.

Duffy said on the conference call that the plan is to roll out HDTV in the latter part of 2006, with full deployment by the end of 2007. NTL began rolling out VOD service earlier this year and was available to about 375,000 customers at the end of the second quarter. Telewest had VOD available to 120,000 customers at the end of the second quarter and expects its 1.2 million subscribers to have access to the technology by year-end.

Duffy added on the call that the merger could accelerate the rollout of VOD and digital video recorders.

“What we need to do now in the near term with Telewest is to sit down and make sure we sync our plans,” Duffy said. “Until we’ve done that, I can’t give you a new timeline. But it’s almost common sense, if they’re going out and doing all sorts of bids and offers and RFQs [Requests for Quotations] and developing rollout plans and we’re doing the same thing, you can take time and cost out of that process by doing it just once.”

Accelerating its VOD rollout will be key — British Telecom, the U.K.’s largest telephone company, is gearing up to launch its own VOD product next year. And earlier this year, BT reduced the prices on its VoIP product, likely in anticipation of increasing competition with NTL and Telewest.

But Duffy said that although NTL has been more aggressive on pricing than Telewest — NTL introduced an introductory rate of 9.99 pounds ($17.59) per month for its 1-Mbps broadband product in June, down from the 17.99 pounds ($31.68) per month it had previously charged – that doesn’t mean that stance will continue.

“You should not expect more aggressive price discounting; I don’t think it’s necessary,” Duffy said. “We simply made the decision that this would be the year of maximum volume adds; we went for a land grab. We brought people in on a temporary offer to get our maximum share of broadband in 2005 and it’s been extremely successful.

He added that the value of the bundle is compelling even without discounts.

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