Pending Deals May Build chellos Muscle

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London-High-speed Internet-service provider chello broadband N.V. will significantly strengthen its position in Europe, and enter the British market, if a few expected deals become reality.

Amsterdam-based chello has delayed its planned initial public offering twice in recent weeks-most recently on June 7-due to what it called "ongoing strategic discussions that, if concluded, would have an outcome relevant to shareholders."

The talks reportedly involve an equity and affiliation agreement with United Kingdom MSO Telewest Communications plc and merger discussions with the European operations of U.S.-based Internet-over-cable service and Web portal developer Excite@Home Corp.

Chello refused to comment on the reports, citing legal restrictions ahead of the planned IPO. Telewest, which reportedly would buy a minority stake in the ISP, also declined, while a spokeswoman for Excite@Home said "the talk about chello is pure speculation."

Nevertheless, both deals would make sense for chello, which is owned by Europe's leading private MSO, United Pan-Europe Communications N.V.

Because the European Commission decided in April not to mandate cable systems in its member states to provide open access, chello is generally confined to sealing deals with systems owned by UPC.

At the end of last year, UPC had 7.6 million subscribers across Europe, but most have yet to receive digital upgrades. Chello's pan-European subscriber base amounted to 187,000 homes at the end of April.

A U.K. distribution deal with Telewest, with about 110,000 digital subscribers, would substantially increase the company's reach.

Both the Telewest and Excite@Home deals would provide chello with much-needed local content, said Sven Maltha, a senior advisor and partner at Dutch research consultancy Dialogic, which has just conducted a major European broadband survey for VECAI, the cable operators' association in the Netherlands.

"What we learned from the [survey] is what chello needs in the first place are local partnerships for supplying content services to Internet subscribers," Maltha said. "In every country, it is looking for partnerships."

Telewest had already garnered 80 content partners for its Internet-over-TV "walled garden," and Excite has localized Internet-portal operations in the U.K., Italy, Germany, France, Spain, Netherlands and Sweden. At the same time, Telewest has its own broadband-Internet service for the PC, Blue Yonder.

Excite@Home probably needs chello more than chello needs the U.S. company. In the Netherlands, Excite@Home's biggest European territory, "chello is much more successful than @Home," according to Maltha. He estimates that chello has 50,000 Dutch subscribers compared with about 10,000 for Excite@Home.

Chello parent UPC is also aggressively expanding into the key German cable market, where Excite@Home plans to launch but hasn't done so.

A deal between Telewest and chello might run into regulatory difficulties, however. The European Commission is currently investigating Microsoft's acquisition of a 29.9 percent stake in the U.K. operator on competitive grounds, and the computer-software giant has just upped its stake in UPC to 8 percent.

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