01 Jan 2003

Having pulled NTL back from the brink of financial oblivion, Barclay Knapp says he doesn't know how to spell the word 'deal' anymore. The smooth-talking mid-westerner, once crowned the King of Cable for his deal-making skills, is trying to re-invent himself as a hands-on manager, with his sleeves rolled up and a realistic plan for signing up more cable users stuffed in his back pocket.

In these more sober times, post-Worldcom and NTL's own filing for Chapter 11 bankruptcy protection early last year, it's a narrative that the market is quite eager to hear. But those of us who know Knapp best for his sharp-dealing savvy are left doing a bit of a double-take.

It took exquisite negotiating skills not only to build NTL but also to bring it out of Chapter 11. How else do you explain why bondholders agreed to swap £7bn in debt into new equity in a business that is still heavily leveraged (to the tune of £3.7bn) and is facing an increasingly competitive market? And although others, including co-founder and chairman George Blumenthal as well as company COO Stephen Carter, have lost their jobs, Knapp remains firmly at the helm. Now that takes some kind of skill.

The new Knapp may say he is a reformed businessman, but ultimately, it is another deal - the much foreshadowed merger with the UK's second cable operator Telewest - that Knapp will have to do to give his new shareholders a chance for a decent return on their investment. Yet Knapp recently pooh-poohed a merger with Telewest, saying that he believed he could reach NTL's objectives of meeting its earnings forecasts "on a stand-alone basis."

This change of tune (he has been hinting at a merger of the two cable companies for years) will likely dismay Telewest, which has its own problems.

NTL is itself trying to marry its stated growth expectations with a plans to reduce the capital expenditure budget. It has cut its earnings and revenue targets some 20% from forecasts set in February 2002, two months before it filed for Chapter 11. The new NTL will continue to burn cash through 2005, according to analysts, and yet the level of leverage on NTL's balance sheet is not going to allow for a robust investment plan.

As part of the reorganisation, NTL also secured $500m in a so-called "exit facility" from its bondholders. This sounds good but the money carries some heavy conditions concerning borrowing, paying dividends, and selling assets, meaning the bondholders-turned-shareholders are keeping Knapp on a pretty tight rein. Revised plans call for NTL's capital spending for 2006 to be cut some 7% below the 2000 level of £500m, which can only mean that Knapp is expecting to squeeze more money out of an essentially static client base of around 2.6m subscribers.

But getting cable customers to subscribe to more than one service is not easy. Of cable's three services - TV, telephony and internet - 70% subscribe to two and an estimated 15% sign up for three. NTL's business has been built on passing more homes and increasing penetration. Now the focus must be on increasing ARPU (average revenue per unit), achieving better margins from suppliers and mandating kick-ass customer service to retain subscribers.

Meanwhile, competitor BT is now offering more attractive pricing plans, not just for plain vanilla telephone service, but also for high-speed broadband that competes directly with cable's version, while DTT platform Freeview could increase churn amongst basic cable subs. Sky, which owns the rights to the most important sports and movies, has recently won its three-year-long battle with the UK's Office of Fair Trading over its alleged predatory pricing. One potential bright spot is the appointment of former NTL managing director Stephen Carter as chief executive of new super-regulator Ofcom.

Sky and BT are running national businesses, whereas NTL and Telewest are regional businesses. Of course a merger would create costly, management-diverting problems of integration. NTL is still putting the finishing touches on integrating customer management systems inherited when it led UK cable consolidation and there are still question marks over whether it can compete in business telephony.

Telewest and NTL might be better served by holding off on a merger in the short term and continuing to work together on joint equipment purchasing and national co-marketing campaigns.

Perhaps Knapp is right and the 'ultimate deal' is still a long way down the track. Until then, the new Knapp will have to use all his charm to keep the US-based bondholders-turned-shareholders happy. Making a deal with them might actually end up being Knapp's ultimate challenge.