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October 12, 2006

Volatility in NTL On Recent News

NTL Incorporated (NTLI) shares have sold off the last few days, giving back most of the gains achieved after several management presentations at media conferences in the US during September.

Investors responded favorably to the presentations in which management indicated that 3Q06 results would be satisfactory. This was welcome news following published reports of the cooling of interest by private equity firms in an NTLI takeover.

The last few days NTLI sold off ahead of and in response to news out of its UK competitor, Carphone Warehouse (CW). CW initiated the latest broadband pricing war in the UK when it began an offer of “free broadband” if a customer was taking certain telephony products. The latest news out of CW is that it is buying AOL UK, an internet access business with about 2 million subs of which 1.6 million receive broadband via DSL. CW also announced that it added 150,000 broadband subscribers under its free offer in the latest quarter.....

I think another factor in the sell-off was the announcement on Monday that Setanta sports would launch a channel on UK TV provider Freeview that would televise the attractive package of Premier League soccer matches that Setanta won the rights for earlier this year. This puts Premier League games on NTLI’s two primary TV competitors as Sky has many subs directly related to its long running rights package.

Analysts do not think the sell-off in NTLI shares in response to the news out of CW warrants the sell-off. They point out that consolidation in the UK broadband marketplace eventually should lead to more rational pricing. Additionally, the rate of growth in broadband subs for CW slowed considerably in the quarter. It is not clear what the reason is for the slower growth. One analyst noted that it could be a sign of cooling demand (good for NTLI), increased competition from Sky’s new free offering (bad for NTLI), or a temporary step back by CW until it can access more of the new subs directly rather than over BT’s network (good and bad for NTLI).

The fact that I have been in and out of NTLI several times over the past couple of years indicates my ongoing interest in the stock. By most valuation measures it is the cheapest major cable stock in the world by a significant amount. However, the UK market is arguably the world’s most competitive for the triple play product bundle.

My primary concern at the moment is that the budget that management has for 3Q06, which they are signaling they have met or exceeded, won’t be good enough for the investment community. NTLI needs to show that sustainable mid-single digit revenue growth is in the cards. Without that prospect, I don’t think the street will pay for the massive free cash flow even though it enhances shareholder value as it builds.

For the time being I remain skeptical of the growth potential and on the sidelines but that could change, which explains why I keep updating you on this stock that goes nowhere.

Posted by Steve Birenberg at October 12, 2006 09:09 AM in NTLI