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March 27, 2006
NTL Incorporated: New Purchase For All Clients
Last Friday, I purchased a new position in NTL Incorporated (NTLID – the D will be dropped shortly) across all Northlake client accounts. I think the stock has potential upside to at least $40 per share based on a successful merger with Telewest. The merger closed at the beginning of March. I define success as (1) the ability to produce several years of revenue growth in 3-5% range beginning in 2006 with growth at the high end of that range, and (2) the realization of cost synergies that will drive pro forma operating cash flow (EBITDA) margins from 35% in 2006 to 40% in 2008. If these goals are met, the company will produce about $2.4 billion, or $8 per share, in free cash flow over the next three years. With NTLI trading at $28.40 and debt at 4.6 times EBITDA, the free cash flow generation provides big upside to shareholders, and even if it falls short by $500 million still provides a cushion on the downside....
The reason I am stepping up NTLI now is because long-rumored interest from private equity players should come to fruition in the next month or two if it occurs at all. According to a recent research report from UBS cable analyst Aryeh Bourkoff, NTLI management has "acknowledged informal recent private equity interest." Bourkoff's report goes on to note that a March 1st UK Times Online report quotes NTLI Chairman Jim Mooney characterizing the value of private equity overtures as "not anywhere on the same planet."
Following yesterdays' news that Liberty Global (LBTYA) sold its slow growing French operations for 11 times 2005 EBTIDA, I can see where Mooney is coming from. If NTLI were to sell at 11 times 2006 EBITDA, the price would be $56, double the latest quote! I suspect that private equity views UK cable assets as more mature than cable assets in France, which would argue for a lower multiple at NTLI. Each multiple point is worth $8 at NTLI so there is a lot of wiggle room.
An educated guess places the informal interest from private equity in the mid-$30s or around 8.5 times EBITDA. This figure is unadjusted for up to $10 in hidden value for NTLI's content assets and NOLs. As you can see, if a private equity deal emerges, the upside is substantial.
I think NTLI has fundamental support around $25-26 if private equity walks away. This sets up a favorable risk reward-reward tradeoff if my analysis that NTLI would fetch at least $40 in a leveraged buyout is accurate. Furthermore, I think the shares could reach $40 on fundamentals alone if current projections for 2008 turn out accurately.
I'll post some more basic financial data on NTLI later this week. In the meantime, please scan through the Media Talk archives to review may previous postings on NTLI (there were a bunch of posts last December). You might want to review the more recent posts about a potential merger with Virgin Mobile as that possibility is on the front-burner. Finally, if you head over to Google News and type NTL into the search box, you will find it easy to read UK press reports about the company.
Posted by Steve Birenberg at March 27, 2006 10:00 AM in NTLI
1.DO YOU THINK THAT NTLID WILL DECIDE ON ITS OFFERS IN THE NEXT 1 TO 2MONTHS? WITH ITS NEW MANAGEMENT STAFF ,DO YOU THINK ITS LIKELY THAT NTLI WILL BE WILLING TO ACCEPT ANY ACQUISITION
BID SO SOON AFTER THE NEW STAFF TOOK OVER?
2.CETV DID NOT DROP ITS PRICE SUBSTANTIALLY EVEN WITH THE SECONDARY OFFERING.DO YOU THINK CETV IS NEAR
ANOTHER PRICE RUN AND/OR IS ABOUT TO COMPLETE ANOTHER ACQUISITION?
3.MICC HAD ANOTHER PRICE RUN WITH REUTERS' NEWS OF MULTIPLE BIDS AT $50 PER SHARE[NOT CLEAR WHETHER THE BIDS WERE FOR PART OR ALL OF THE COMPANY]. THE IMPORTANT VIETNAM
MARKET IS STILL BEING ACTIVELY PURSUED BY THEM.DO YOU THINK ITS LIKELY THAT MICC WILL ALSO DECIDE ON THIS BID IN THE NEXT FEW MONTHS OR WILL HOLD OFF TO WAIT ON THE SETTLEMENT OF THE VIETNAM ISSUE?AS PER THE YAHOO MESSAGE BOARD , DO YOU THINK ITS LIKELY THAT WITH THE ONGOING COMPETITION THAT MICC WILL EVENTUALY GO FOR $55 TO $60 PER SHARE.
4. WHICH OF THESE 3 STOCKS AND COMPANIES HAS THE BEST UPSIDE POTENTIAL AT PRESENT AND IN A DOWNWARD MARKET?
1. The ball is in the court of private equity. If they want to make a move on NTLI, all they have to do is make the offer and leak it to the financial press. As long as it is a reasonable price, say $35 or more, the pressure will shift to NTLI management to negotiate. I am fairly confident that NTLI management would view $35 as way too low. But I don't really care about that. What I care aobut is whether private equity will actually bid. There is no way to know if they will or when they will. I suspect it wouldbe inthe next few months as the Virgin deal wraps up and the IRS ruling comes down. I do kow that raisign themoney for a bid will be a piece of cake.
2. I think it is a good sign that CETV was able to price its deal at $70. That showed real demand. Reuters said the deal was 5 times oversubscribed. If the market provides a tailwind and emerging markets stay uprigth, I think CETV can make another storng move soon. I don't think a big acquisition is inthe immediate future but I have no way of knowing. I think they felt it was a good price and as I have said, "raise money you can, not when you have to."
3.I do not follow MICC closely enough to have an opinion. I would be surprised if there we no deal. I doubt the deal gets done much higher given the comparable valuations of other wireless companies.
4. Hard to answer this one. NTLI has themost potential for a big pop if a deal emerges. And as long as thereis hope for a deal, downside protection is solid. CETV had great fundamentals and a grwoing following but it is subject to the vagaries of daily trading. MICC I think will be farily stable as the cards ahvebeen dealt. I own NTLI and CETV for myself and clients. If I had to own just one, it would be CETV because the long-term growth potential remains outstanding.
Posted by: Steve at March 28, 2006 04:13 PM