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December 04, 2005
NTL Merging With Virgin Mobile
I woke up Sunday morning to learn that NTL Incorporated (NTLI) will be merging with Virgin Mobile, according to numerous sources in the British and American press. It appears this deal will occur roughly simultaneously with the closing of the NTL-Telewest (TLWT) merger early in 2006. The new company will be named Virgin and the entire quadruple play bundle of cable TV, high speed internet, wireline telephony, and wireless telephony will be rebranded under Virgin.
While effectively a merger, from a financial perspective NTLI is buying Virgin Mobile. News reports suggest the deal might be done for around $1.4 billion. Richard Branson owns 72% of Virgin and will take stock in the new company in return for his Virgin shares. He will become the largest shareholder of the merged entity at 14% of the equity. It is not clear yet what minority holders will receive. Pro forma market cap of just NTLI-TLWT is around $7 billion with another $10 billion in debt, so the deal is not difficult to swallow financially...
Clearly, the motivation behind the deal is strategic. NTLI has been plagued by fears about its growth rate, which is down to low single digits before merger synergies with TLWT. The competitive environment in the UK is fierce and NTLI's TV and telephony businesses are under a lot of pressure from British Sky Broadcasting (SKY) and British Telecom. Early analysis from the British press views the Virgin-NTLI-TLWT merger as a shot across the bow of the Rupert Murdoch-controlled SKY. The new company plans to bid aggressively for the rights to Premier League football which SKY has held exclusively and has been a major competitive advantage in the TV battles. Sky has just entered the high speed internet business via a small acquisition and has no telephony products. The British press views BT as a clear loser because they have no TV and hamstrung by being the incumbent, legacy landline telephony vendor.
I don't have any numbers yet and have to hop on a pane but with that caveat I think the market will like this deal from NTLI's perspective. Branson is offering a major vote of confidence by taking shares not cash and providing the Virgin brand with which he is so closely associated. He is the face of the new company although NTLI CEO Simon Duffy will remain. The deal will create some excitement around the new NTLI, which the market has given up on due to growth and competition issues. Adding faster growing mobile and becoming the only company to complete the quad play addresses the growth issues, at least in the near-term. The new NTLI will offer one bill, four services, a hot brand, a way to address the fixed to mobile movement of UK customers, possibly Premier League football, scale, and significant free cash flow. Mobile is decelerating in Europe but I think in the near-term this deal will be received positively because it addresses the growth issues.
NTLI and TLWT are on the agenda at the UBS Media Conference. Assuming they don’t cancel, I'll try to get out an update after their presentation, if not on Monday, after I have access to some numbers.
Posted by Steve Birenberg at December 4, 2005 11:14 AM in NTLI
Cetv keeps going up on price without any obvious news ? Do you think this represents a residual
"cramer effect",is secondary to the ubs media conference, or is there some substantive news pending?
I think it is residual Cramer effect plus recent strength in Central European stock markets. I stand by my feeling that the stock can trade into the $60s on 2006 estimates and much higher if the story holds together for 2007 and beyond as I expect it will. That said, prudent portfolio management may lead me to sell a little as it gets to the doorstep of $60.
Posted by: Steve at December 5, 2005 08:39 PM1.Virgin initially turned down NTLI's first bid.Do you think its still likely that they will merge?
2.CETV stock price has been extremely volatile with both large upward and downward moves on large volume, but with its price seemingly pegged, at certain different times, to specific prices [e.g. 56,59, and 58].Do you think that this odd price action reflects large mutual funds and/or hedge funds positions? I could not find any news on the internet which correlated with this action.
1. Yes, I think the Virgin deal will get done at a slightly higher price. Investors like the deal due to the poor reputation NTL has for customer service. Rebranding under the powerful Virgin brand, one of the tops in the UK, will help NTL-Telewest compete. There will also be a benefit fromt he ability to offer wireless as part of the bundle.
2. You should ignore the short-term CETV moves. Even on decent volume days it is a volatile and jumpy stock. The daily moves generally have nothing to do with any news flow. I do not htink the big moves are due to large funds. Rather they are do to uninformed individual investors who buy and sell without knowing the stock is not very liquid. Recently, more of these investors got invoilved in the stock due to Cramer. I trimmed positions for clients at $59.25 earlier this week. I'll have a post up on that on Monday. CETV remains my largest position but is now at a "normal" weighting.
Posted by: Steve at December 9, 2005 11:37 AMReuters reports some interesting developments about NTLI.
1. a senior executive at Comcast will become the new ceo of NTLI.
2.NTLI is said to be restructuring the merger with Telewest as a reverse takeover.
What do you think the ramifications of these events will probably be for NTLI?
As far as I can tell the reverse merger is irrelevant to the valuation. It is necessary due to some tax and transfer of ownership issues. I do not beleive it impacts the economics of the merger to either NTLI or TLWT shareholders in anyway. I'll be checking more on this and will post again if I learn differently. I believe NTLI will split 2.5 to 1 immediately prior the final merger.
Simon Duffy is taking the fall for the poor performance of the stock and company over the past year. The Street doesn't like him or trust him so the fact he is being pushed aside is a positive. I don't know the new guy from Comcast but he seems to have the rgith qualifications.
The press release said a new joint proxy was issued. I can't pull that up yet but it could contain more significant info on the future propsects for the business. This could be an important document as far as the stock is concerned. I'll also post on this once I have somethign relevant to say.
Overall, I think NTLI has seen its lows and has a good chacne to reachng the old highs with in the next few months.
Posted by: Steve at December 15, 2005 08:09 AM