01 Sept 2003

Barclay Knapp, the man who audaciously built the UK's largest cable TV company by borrowing piles of money, finally stepped down last month saying: "It's been a real dream for me to start NTL, to run it and to bring it to where it is today." Well, excuse me, but it turned out to be far from a dream for NTL shareholders who watched as their massively over-leveraged company disappeared last year into Chapter 11 bankruptcy and then hammered out a $10.9bn (€9.6bn) debt-for-equity swap. Shareholders were left with less than 1% of the newly-issued stock.

To add insult to injury, the man who orchestrated it all was bizarrely kept at the helm after restructuring was completed in January, ostensibly to take a firmer grip on the operating side of the business. And the funny thing is, he almost won over his detractors with the financial results he delivered in the second quarter which saw the stock double (a 40,000 net gain in customers, a reduction in churn to 12.9% and a 4% rise in average revenue per unit).

But his upbeat final financial presentation was marred by his incredibly tactless thanks to investors and company employees for "a whole decade of wonderful experiences and personal growth for me." The key words there being "for me". Knapp's personal growth came at a high cost to investors, sacrificed when his empire-building crashed.

Knapp's reflection on his decade at NTL reveals both his strength and weakness in business. His grasp of the intricacies of financial matters and his ability to convince an audience that he can make the numbers work are his talents. A mathematician by training, Knapp told me once that he saw his job at NTL as "having fun with big numbers". On the day his departure was announced he lamely tried to explain why the company had taken on so much debt, saying, "We couldn't foresee the capital markets going so bad." But he plainly contributed to the fallout by piling more debt on a company that wasn't (and still isn't) paying its way.

Some say debacles like NTL are the fault of banks for lending "easy money" or that the high borrowing was necessary to ride out the overheated markets of the late 1990s. But remember Vodafone, where CEO Chris Gent managed to build up the world's biggest mobile phone business without lumbering the company with crippling debt.

Knapp is a self-proclaimed company builder and his aggressive tactics made NTL the biggest survivor of UK cable consolidation. Deals like buying Cable&Wireless's CWC cable TV unit for £8.2bn in 1999. He paid mightily for it, but cannily got France Télécom to bankroll a big part of the purchase price by selling it a stake in NTL at the same time. The French company fell into the red last year in part because of the huge write-down of its NTL purchase.

Interestingly, the man filling Knapp's post at NTL is Simon Duffy, CFO of Orange up until last March, the entrepreneurial mobile phone start-up sold to France Télécom in May 2000, also at an inflated price.

It is telling that one of Duffy's first comments about how he plans to run things concerned increased financial transparency. First, he plans to reveal subscriber acquisition costs (SAC), which is a major metric used by analysts to measure the cost of adding a new subscriber relative to the revenue, known as average revenue per user (ARPU). NTL rival BSkyB has always revealed its SAC costs, which in the case of the satellite pay-TV company have been falling as a proportion of ARPU. NTL has been less forthcoming with these figures saying that in the three-product cable TV environment it is much harder to ensure accuracy. To his credit, Duffy says that he wants to be a transparent as his competitors.

What's next for NTL? Oddly, raising more money. When NTL restructured it didn't swap out all its debt and even took on more at a prohibitive interest rate to cover the transition out of Chapter 11. The so-called exit facility represents only 8% of NTL's total debt load of $6.5bn but it is a whopping 17% of the cash interest burden. In particular, the planned refinancing will provide the capital NTL needs to start building the business.

Given the robust share price, this will likely be done with a rights offer.

Ironically, Knapp has been elected to help sort the refinancing, probably because he knows NTL better than anyone. Only once a more robust capital structure is in place will NTL be able to contemplate negotiating a merger with Telewest to give it the scale economics needed to combat the likes of Sky and BT. Knapp's hand-over pay packet is $2.1m, three times his annual salary. Nice work if you can get it. The question for NTL is, will the golden good-bye put the dream back on track?