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October 05, 2005
NTL and Telewest Finally Announce Merger
The following entry appeared in its entirety on StreetInsight.com on October 5, 2005.
NTL Incorporated (NTLI) and Telewest (TLWT) announced their long awaited and long overdue merger on Monday. The terms were about as expected with TLWT shareholders receiving value of almost $24 per share composed of $16.25 in cash plus .115 shares of NTLI. I like the deal and I am surprised by the sell-off in NTLI shares since the deal was announced. I do not own a position in NTLI presently but if the shares go much lower I will probably re-enter on the long side (I still own NTLIW – hopelessly out of the money warrants to purchase NTLI)....
....I am not sure why NTLI is trading down. The deal is very accretive on a free cash flow basis so the increase in leverage to over 4 times EBITDA is an opportunity for shareholder value creation and not a risk. I suspect two issues have cropped up. First, an article in The Guardian on Tuesday indicated that U.K. regulators will look at the merger as a possible opportunity to force NTLI to open its lines to competitors. A similar law is already on the books forcing British Telecom to sell access to its lines. Second, concerns about the growth potential for the combined entity are lingering. NTLI has produced very low single digit top line growth the last few quarters and TLWT has only been growing in mid single digits.
I have a few inquiries in about the potential regulatory issue. I can’t add much value on that subject yet beyond what I read in The Guardian. Over the past several months, I had never read anything about this in any newspaper article or analyst report about NTLI or TLWT.
As far as growth is concerned, that is a legitimate issue but I think NTLI is a value play and as long as EBITDA levels and thus free cash flow are held at least at pro forma 2005 levels plus cost synergies, the paydown of debt will effectively transfer value to shareholders from debtholders. Analysts are estimating over $400 million in pro forma free cash flow for 2006 before synergies which works out to over $3.50 per share. Cost synergies are expected to ramp up to over $440 million in 2008 providing another $4.00 per share in shareholder value creation. Synergies should begin to be realized in 2006 with significant amounts in 2007.
NTLI looks like it is trading at less than 10 times 2007 pro forma free flow and maybe less than 10 times 2006 free cash flow. Virtually every media company in the world trades at a 50-100% premium to that figure. With that kind of valuation and at least stable free cash flow for the next few years, eventually investors seem likely to step up to the plate on NTLI. I'll let you know when I do.
Posted by Steve Birenberg at October 5, 2005 07:47 AM
RECENTLY,IT APPEARS AS IF A NUMBER OF GROUPS HAVE MADE OFFERS TO PURCHASE THE COMBINATION OF NTLI AND TELEWEST,BUT MAY HAVE BEEN TURNED DOWN BY THE MAIN STOCKHOLDER IN THESE TWO MERGING COMPANIES.DO YOU HAVE ANY IDEA OF WHAT THESE OFFERS ARE? WILL THE OFFERS BE RECONSIDERED IN THE FUTURE? AS NTLI HAS LOST MUCH MARKET PRICE AT PRESENT, WOULD FIRM ACQUISITON OFFERS FOR NTLI REVERSE THIS TREND AND SET A MINIMUM PRICE FOR NTLI? PLEASE COMMENT.
Posted by: mplate at October 16, 2005 02:07 PMOther than the initial WSJ article on this subject, I have not seen anything about possible alternative buyers. Assuming that story had basis in fact it provides downside support for NTLI shares. While I spoke with one person who thought the alternative buyer story might have been a plant given the poor reception to the NTLI-TLWT merger I am not that much of a conspiracy theorist. Therefore, I view the news as validation of the potential long-term value of this deal via free cash flow. If my market outlook improves and the shares stay near $60 I am leaning toward buying back NTLI.
I do believe the market wants to see top line growth before paying for the free cash flow. Mid-single digits will do. Unfortunately, that is not likely in the current quarter so I fear NTLI just remains unusually cheap for a bit longer.
