Case study


by Professor Ian H. Giddy
New York University


  • What was the economic rationale for this acquisition?
  • <>How much of the purchase price was paid in cash, and how much in shares? Why?

The Deal

NY Times, Oct. 3 2005 - The British cable operator NTL said today that it had agreed to buy its rival, Telewest Global, in a $6 billion deal that would bolster their ability to compete with British Sky Broadcasting and British Telecom.

Telecommunications analysts at Oppenheimer said the combination would produce a "strategically competitive" company that would generate bigger cash flow margins than expected.

NTL and Telewest both own cable, broadband and telephone businesses that were created through purchases of smaller companies over the last decade.

NTL and Telewest have been struggling separately to stave off competition from pay television channels, particularly British Sky Broadcasting, which is controlled by Rupert Murdoch's News Corporation. Together, the two expect to reap £1.5 billion in savings, at a rate of £250 million a year by 2008. Some of this cost-cutting will come from lost jobs, the companies said, but they did not elaborate.

Together, NTL and Telewest would l have a cable footprint capable of covering more than 50 percent of British households and have more than 5 million residential customers. The combined companies would have revenues of £3.4 billion as of the 12 months ended June 30.

The combined company would also become Britain's second-largest telephone company after British Telecom.

Bulking up will help NTL become a tougher competitor, company executives said. "There are so many small franchises trying to compete with Sky and British Telecom, all offering different content and different platforms, that it's hard to for any of them to grow large enough," NTL's chief executive, Simon Duffy, said in a telephone interview.

The deal "puts us in the 800 pound gorilla camp," said Mr. Duffy, who would become president and chief executive of the combined company.

"We will be much more effective as a larger company" he added. In addition to cutting costs for duplicate programs, like starting up HDTV, for example, NTL and Telewest would be able to spend more together on marketing and product innovations, he said.

NTL plans to keep Telewest's programming arm, Flextech, a unit Telewest put on the block earlier this year.

The financial markets had been expecting NTL's purchase of Telewest for nearly a year, and serious negotiations between Telewest and NTL have been continuing since early summer. Mr. Duffy said the deal took a long time to negotiate because it was "inherently complex." Besides, he said with a laugh, "they were unreasonably tough negotiators and they wouldn't say yes."

The Financing

< style="font-family: helvetica,arial,sans-serif;">The cash and stock deal values Telewest at about $6 billion, or $23.93 a share, a 4.2 percent premium to Telewest's closing price on Friday. NTL will make 70 percent of the offer in cash and 30 percent in its own stock. < style="font-family: helvetica,arial,sans-serif;">NTL is offering $16.25 in cash, plus 0.115 shares of its own stock for each share of Telewest. In order to finance the deal, NTL plans to refinance its and Telewest's existing debt and raise new financing of £1.8 billion, or $3.2 billion. The combined companies would have net debt of £5.7 billion, or $10 billion.

Financing is being arranged by Deutsche Bank, Goldman Sachs, JP Morgan Chase & Co and Royal Bank of Scotland. Telewest was advised by Deutsche Bank and Rothschild, NTL was advised by Goldman Sachs.

The deal had a muted effect on the companies' stock prices. This afternoon, in Nasdaq trading in New York, NTL's shares were down 98 cents, or 1.5 percent, to $65.82, while Telewest's shares were up 17 cents, or 0.7 percent, to $23.12. | | | | contact
Copyright ©2005 Ian Giddy. All rights reserved.