NTL to Buy Telewest for $6 Billion, Amid Tough DBS Competition
In the 2nd European cable deal in 3 days, NTL is buying Telewest for about $6 billion, after the U.K. firms struggled with satellite competition and financial restructurings. No. 1 U.K. cable operator NTL, which emerged from bankruptcy in 2003, will be better positioned to compete with BSkyB if it completes the merger with Telewest, analysts said. Shareholders of Telewest, which emerged from what it called a “financial restructuring” last July, would get a mix of cash and stock under the deal, subject to regulatory approval and expected to be completed by March 31.
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Analysts said Rupert Murdoch’s BskyB, a formidable competitor for U.K. cable operators, previously spurred consolidation. Competition may increase further, said Stifel, Nicolaus analyst Ted Henderson: “It’s going to be tougher and tougher to compete with Murdoch.” Firms run by Liberty Media and Liberty Global Chmn. John Malone at various points owned stakes in NTL and Telewest, which combined will have almost 5 million subscribers. The Murdoch factor may keep Liberty Global from being drawn to U.K. cable properties, Henderson said: “I will point again to the dominance of satellite in that market. Malone is used to markets where cable is the dominant video player -- In the U.K. that’s clearly not the case.” Liberty Global agreed Fri. to buy Switzerland’s largest cable operator for $2.19 billion (CD Oct 3 p8). Henderson has a “market overweight” rating on shares of Liberty Global.
The combination of NTL and Telewest may presage more such deals, as European telecom and cable firms consolidate, analysts said. “It’s going to be an interesting time over there; there is a parallel structure with the competitive pressures we are witnessing over here,” said Tom Burnett, pres.-Merger Insight, an affiliate of Wall Street Access. NTL and Telewest executives said the transaction would cut costs. “The combined company… together with Telewest’s content division, will strengthen cable’s position in the multi- channel TV marketplace,” NTL said in a statement. The deal “marks not just the culmination of a decade of consolidation, but, more importantly, the creation of a new competitive force,” said NTL CEO Simon Duffy. He'll keep that job after the acquisition.
Added heft will let the combined firms trim programming costs, said cable consultant Steve Effros. “Anytime you get scale and you get both adequate revenue streams and the ability to get into the capital markets, it gives you the opportunity to expand, whether that’s within borders or outside of borders,” he said, adding that such an expansion strategy is “purely dictated by the business dictates of that particular moment.”
Some analysts were concerned the deal won’t create a more streamlined company. Standard & Poor’s said it may cut its double-B-minus corporate credit rating on Telewest. The “financial risk profile” of NTL and Telewest will be weaker than the latter firm’s as a separate company, S&P said. “A key business challenge for the merged entity will be to retain focus on customers and product development as the internal restructuring proceeds,” wrote credit analyst Simon Redmond.
The merged firms could bid for cable systems in European markets where Liberty Global doesn’t operate, such as Germany, said Henderson: “There are a lot of markets they could jump into where Liberty Global isn’t.” The basic strategy is to lure as many new customers as possible, said Burnett: “There are only so many eyeballs, and everybody is trying to get their service in front of them.”