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August 16, 2006

NTL Sees Renewed Interest From Private Equity Firms

News broke yesterday in London that NTL Incorporated (NTLI) was again subject to takeover interest from private equity firms. Later in the day, Bloomberg reported that the company was in talks with a consortium of four private equity firms and the talks were beginning to focus on price.

I covered these developments in two posts that went up at StreetInsight.com during the day. I thought clients might be interested in seeing those posts in chronological order to see how the story and my thinking was developing.

At 9:29 Eastern, I posted:

The Times of London is reporting that private equity is approaching NTL Holdings (NTLI) again. This likely accounts for the recent strength in the shares following mixed second-quarter results. On the second-quarter conference call, the CEO was very clear that the company was open to any approaches that would enhance shareholder value. At the time, I wrote that this was the most explicit statement the company had made on the topic.

The reason that was important is because the company apparently rejected a $32 offer last winter. According to today's news reports, several large shareholders are submitting a letter to the company asking why that was done. This looks like a well orchestrated one-two punch to me.

Today's reports suggest a $19 billion value for NTLI. With $11 billion in debt, that works out to just $24-$25 per share. I suspect if the board would play ball, a negotiated deal could get done in the upper $20s or better. NTLI's outlook is not as good as it was last winter due to intense competition in the U.K. broadband market.
NTLI is a good candidate for private equity as merger synergies and a slightly growing top line lead to very significant free cash flow generation in 2007 and beyond. Some analysts have estimated that free cash flow could be around $800 million. NTLI also has content assets worth around $1.5 billion and NOLs valued at $1.7 billion.

As a frustrated shareholder, I'd be fairly happy with a deal around $30.

At 2:45 Eastern I posted:

Bloomberg is now reporting that NTL Holdings (NTLI) is in talks with a consortium of private equity firms regarding a buyout. The report suggests the talks have advanced to the stage where discussions are focused on price.

Last winter, NTLI rejected what it called unofficial approaches from private equity which valued the shares at $32. It is possible, even likely, that a deal would now be struck at a price below that level given the increased competition in the U.K. broadband market this year and NTLI's mixed results so far in 2006.

Richard Branson is now the largest shareholder in NTLI due to the takeover of Virgin Mobile that closed at the beginning of July. I believe his holding is around 14%. Obviously, his views will be important.

I plan to sit on my NTLI and await further developments. I have been selling some NTLI warrants which are illiquid most days. My warrant position is tiny relative to my common stock position.

Posted by Steve Birenberg at August 16, 2006 03:40 PM in NTLI