Kate Bulkley, Media Analyst.

Viewpoint: Debt delays UK cable 'end-game'

By Kate Bulkley

Advanced TV Markets

Aug 2001

So what's stopping UK cable companies Telewest and NTL from merging? It's a four-letter word called debt. NTL has too much of it and Telewest's shareholders are loath to take it on.

The high-debt being carried by NTL certainly puts the larger of the two cable companies in a weaker position in any negotiations about a merger. Telewest may have fewer subscribers, but with £4.8 billion of net debt, less than half of NTL's net debt of £10.9 billion, one place where Telewest does have more leverage is in the structure of any possible merger plan. Telewest's relatively healthier share price also gives it muscles.

Factoring out the problem of the debt, a merger makes sense. The two companies, whose franchise areas are different, already dominate the cable landscape in the UK and count some 1.5 million digital subscribers between them. They need this kind of scale to compete with their biggest rivals, BT and BSkyB. A full merger would bring big cost savings across systems like IT, sales forces and administration. Some analysts estimate these savings could be as high as £200 million a year.

On the telephone side, cable has been offering a discounted cable phone service but BT has been increasingly successful in fighting back. The cable companies know also that in the long term there is not much to be gained by competing in the commodity phone line business. As for the TV side, BSkyB still holds most of the important content cards, like live Premier League football and Hollywood blockbusters.

NTL and Telewest have a joint pay-per-view movie service called Front Row, but it pales in comparison to Sky's Box Office service. With 5.5 million direct-to-home subscribers and another 4.6 million wholesale customers through cable and ITV Digital, Sky is able to cut the programme deals that count.

There may be no full merger as yet, but the two companies certainly are lining up on an increasing number of projects, from joint procurement of set top boxes to the marketing and rollout of broadband services to the PC. A joint £4 million national broadband marketing campaign has launched and they are in the early stages of creating a broadband portal for their high-speed Net users.

Broadband, both on the PC and TV, is cable's big opportunity to stand out. "For the first time for cable we are not coming into a market after someone else has defined it. We followed BT into telephony. We followed BSkyB into television. We donÕt have to follow anyone into broadband," says Stephen Carter, MD UK and Ireland for NTL.

The reason to merge may be sound but the problem is the debt, particularly the high-yield debt which accounts for nearly half of NTL's debt or£5.5 billion, and most of Telewest's debt or £3.5 billion, according to Merrill Lynch bank. In the current financial environment this debt would be expensive to refinance which could potentially wipe out any cost saving benefits of merging. Telewest's CEO Adam Singer has been trumpeting the fact that Telewest is fully financed to breakeven, while NTL is very likely to need to sell some assets and/or raise some more money to reach breakeven. So why would Singer want to hurry to take on NTL's potential funding shortfall? Telewest's stronger share price and stronger balance sheet means Singer can afford to wait.

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