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November 14, 2005
With Private Equity Sniffing, NTL Getting Interesting
Speculation reemerged two weekends ago that the NTL-Telewest (NTLI-TLWT) deal may be intercepted by private equity investors. As reported by the UK newspaper The Sunday Express, Ajax Partners is considering joining a group of private equity firms with deep media experience that had previously been rumored to be interested in the deal. The original group first came to light when the Wall Street Journal reported on it in early October. At that time, I wrote on StreetInsight.com that this validated the value that existed in the merged entity....
The article mentioned a bid would be valued at over $12 billion at current exchange rates. Pro forma debt of the new company is over $10 billion, so apparently this figure is the value that would accrue to shareholders. If so, the price per new NTLI share would be $108. While that might seem extreme relative to the recent NTLI price of $59.69, it is not that outrageous against current street estimates of EBITDA and free cash flow. For example, UBS analyst Aryeh Bourkoff has 2007 estimates, including synergies, of $2.7 billion and $870 million for EBITDA and FCF, respectively. If the equity in the new deal were valued at $12 billion, total enterprise value would be about $22-23 billion, equating to an EBITDA multiple of 8.6 times. The free cash flow multiple based on equity market cap would be 13.7 times.
Neither of these multiples is unreasonable relative to current public market values of global cable equities, or relative to recent public and private cable asset sales. Cable multiples in the UK are among the lowest in the world due to intense competition across the entire triple play bundle. Indeed, investors apparently are looking to the UK as they compress values of U.S. cable equities.
Each multiple point in a privatization transaction for NTLI-TLWT is worth more than $20 per share, so there is a lot of wiggle room in the ultimate value shareholders would receive in a deal driven by private equity investors. However, the numbers work for private equity at $108 which means anything up to that price is plausible. With NTLI trading under $60, shareholders don't need private equity to bid at its top price to make out like bandits.
NTLI shares have barely moved up since this latest story which would seem to discount its validity. Part of the problem is that BSkyB had a lousy quarter that raised competitive fears another notch. The latest earnings report from NTLI was nothing to write home about, either, and contained continued troubling trends on ARPU, which is viewed as a proxy for the current and future competitive environment. However, TLWT reported a solid quarter last week.
This latest news increases the chances I'll buy back the NTLI shares I sold in August. Downside support seems secure with private equity sniffing around. The NTLI-TLWT deal is scheduled to close in the first quarter of 2006, and the latest article suggested nothing was likely from private equity before that time. In the next few weeks the new company should issue a proxy further detailing projections and synergies. If those numbers align with current analyst estimates, entry before year end seems like good timing as support from the excellent economics of the merger will be confirmed.
Posted by Steve Birenberg at November 14, 2005 10:44 AM in NTLI
Despite acquisition interest in ntli,its stock price keeps dropping.Does this reflect lack of confidence in its management? If the merger goes through,do you think that a solid acquisition offer will be forthecoming to increase again the value of the stock?
Posted by: mplate at November 15, 2005 09:09 AMI think the drop in NTLI is due to lack of confidence if future financial performance. Across all UK telecom and media distribution we have seen poor results and forecasts. Just today, Vodafone, the #1 wireless company in the UK, lowered its numbers. VOD is down 10%. Recently, NTL's major TV competitor, Sky, missed numbers. NTL's results weren't that great either. Given this backdrop, investors are pushing down the shares in anticipation that estimates will come down. This raises the stakes for the upcoming proxy where NTL will lay out its merger assumptions.
Another issue is that the deal won't close for 4-6 months. Thus, any benefits from the merger are put off until then as is the possiblity that private equity could step up. Private equity seems unlikely to enter before 1Q06.
Wordlwide multiples on media content and distribution are declining. NTLI is participating in that. I think it is overdone and too cheap assuming the proxy looks OK.
Posted by: Steve at November 15, 2005 09:20 AMI understand that all acquisition offers for ntli will depend on the succcessful closure of the ntli/telewest merger and may well take 6 months or so.The potential acquisition interest is said to be in the range of 100 to 120 dollars per share and should be supporting the present price of ntli.However,the price of ntli keeps dropping and suggests a lack of confidence in projected targets for ntli.Do you think that the present target earnings for ntli are reasonable ? Also,how likely is it that the merged company will justify the acquisition prices that have been quoted so far? At present, do you think the stock is more likely a buy or a sell?
Posted by: at November 16, 2005 11:47 AMI understand that all acquisition offers for ntli will depend on the succcessful closure of the ntli/telewest merger and may well take 6 months or so.The potential acquisition interest is said to be in the range of 100 to 120 dollars per share and should be supporting the present price of ntli.However,the price of ntli keeps dropping and suggests a lack of confidence in projected targets for ntli.Do you think that the present target earnings for ntli are reasonable ? Also,how likely is it that the merged company will justify the acquisition prices that have been quoted so far? At present, do you think the stock is more likely a buy or a sell?
Posted by: at November 16, 2005 11:47 AM
I think the shares are a buy. However, I don't know what will get them turned around. I am hopeful that an affirmation of synergies and long-term growth in the proxy will be the catalyst but it may take closing of the deal and a decent quarter or two. Clearly, the sellers at current levels don't believe the projected targets will be realized. Also, NTLI is suffering from global selling of media stocks. With Comcast at its yearly low, it is hard for U.S. investors to get interested in UK cable. Comcast has secure double digit growth while NTLI-TLWT will struggle for mid-single digit. That said, there is a path to shareholder value creation at NTLI-TLWT as there is nothing to spend free cash flow on whereas Comcast is still investing in telephony. It is this free cash flow that will ultimately attract either value investors or private equity or both.
Posted by: Steve at November 16, 2005 02:49 PMNTLI STOCK JUST DROPPED SUDDENLY IN AFTER HOUR TRADING NEARLY 9 DOLLARS ON NO OBVIOUS BAD NEWS.
IS THIS DROP REAL? DO YOU HAVE ANY IDEA ABOUT WHAT IS GOING ON?
As far as I can tell the print at $50ish was erroneous. I found no news that could account for it and this morning my quote screen shows a bid-ask which suggests NTLI will open close to yesterday's close of $59.08. If anything changes, I'll post an update here.
Posted by: Steve at November 22, 2005 07:58 AM