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November 14, 2006

NTL Bidding For ITV: A Bad Idea

Shares of NTL Incorporated got a well deserved 5% spanking yesterday after last week's rumors of the company's interest in a takeover of leading UK broadcaster ITV apparently turned into reality. UK newspapers are reporting that NTL will offer about $9 billion for ITV or roughly 13 times 2007 EBITDA estimates. NTLI shares are now down more than 10% in less than a week.

NTLI investors are rightly upset about this move. First, ITV is a struggling, low growth company lacking in management leadership. Second, this is a big deal as NTLI's enterprise value is about $13 billion does not make swallowing a $9 billion deal easy. Third, with NTLI trading at under 7 times EBITDA, this deal is dilutive on a valuation basis. Fourth, assuming the majority of the deal is in cash, NTLI's pro forma leverage goes to over 5 times EBITDA. Fifth, and perhaps most important, an acquisition of ITV likely ends all hope of a private equity takeover of NTLI....

Given all these negatives, why is NTLI pursuing this deal? Management will say that adding ITV's content will allow NTLI to vertically integrate and better compete with Sky's satellite platform. Sky has an edge in exclusive content, especially Premier League football. By obtaining ITV's content and dramatically increasing scale, NTLI should be better able to bid for exclusive content in the future.

Richard Branson is quoted in the press as highly supportive of the ITV deal. At the same time, Chairman of the Board Jim Mooney has generally thrown cold water on private equity overtures. Bill Huff, a distressed bond player who is one of NTLI's largest shareholders has also been presumed to be cool to private equity. Branson has never indicated how he would feel about selling NTLI to private equity but I can’t help but assume that the ITV deal is designed to push away private equity firms. It is just too obvious that all these insiders get their way through an acquisition of ITV.

I am glad I sold my NTLI. If I were still long, I'd be irate at this turn of events. NTLI is claiming progress on the turnaround of its lagging cable business and expects to prove that it can hit its financial and subscriber targets over the next several quarters. If management were so certain of meeting their goals, I just don’t see why they would purse such a large acquisition in a new business. It sort of reminds me of the Comcast move to takeover Disney (although in hindsight that might not have been nearly as a bad deal as most though given that Comcast and Disney have both been on fire in terms of stock price and operations).

I suppose the silver lining for NTLI shareholders is that if a deal for ITV is not consummated, pressure on NTLI to consider private equity offers will ratchet up considerably. That should provide some downside protection but I see no reason to be interested in NTLI form the long side until the ITV saga plays out. And if NTLI acquires ITV, I see no reason to be interested in NTLI from the long side period.

Posted by Steve Birenberg at November 14, 2006 11:08 AM in NTLI