I’ve received several inquiries about the news stories, adjustment of the deal terms, and management changes at NTL Incorporated (NTLI) this week. Here is a quick recap:
• The merger with Telewest (TLWT) was restructured so that technically TLWT is buying NTLI. This has no economic impact on either NTLI or TLWT shareholders as it the change is meant to protect TLWT’s UKTV content asset against a right of first refusal owned by the BBC in the event of a change of control at TLWT. If the BBC is able to exercise the change of control provision it would be a modest negative for the merged company….

• NTLI CEO Simon Duffy has been reassigned to a purely strategic role and a new CEO, Steven Burch, formerly head of Comcast’s Atlantic Division, has been brought aboard. Burch is apparently well regarded as an operational manager and will head up the extensive integration efforts between NTLI and TLWT. The street has blamed Duffy for NTLI’s operational missteps in the past year so his being pushed aside is viewed as a positive.
• Those integration efforts still look like they could include the takeover of Virgin Mobile and the rebranding of the entire entity under the Virgin name. News reports out of the UK say that the Virgin deal was Duffy’s and that his new responsibilities include getting the deal done. Other news reports say the merger is still on with several option mentioned that would get a higher price for Virgin minority shareholders. One option would be an increased bid and the press has specutalted it could rise by 10-20%. Another option would be for Richard Branson to take a lower price for his 72% controlling stake so that the savings could be passed through to Virgin minority shareholders. Branson would receive a separate, higher licensing fee for use of the Virgin brand.
• Last Sunday numerous newspapers reported that private equity groups had approached banks and begun negotiations to secure financing for a $14 billion bid for the combined entity. As I have mentioned before the bid price doesn’t make sense (this time too low, previously too high), but the conttinuing articles suggest the private equity interest is real. One street analyst I contacted says the numbers in the articles are probably pure speculation but he believes private equity would be interested in the $70s on NTLI, which is the surviving stock in the deal. Prior to the reworking of the deal, pro forma debt is $10 billion and pro forma shares are 110 billion. A price in the $70s suggests a deal value of around $18 billion. The newly structured deal will increase shares outstanding as NTLI will split 2.5 for 1 upon closing.
NTLI has risen from the mid to upper $50s to the upper $60s over the past month. I’ve always liked the TLWT merger because of the free cash it unleashes even in a minimal revenue growth environment. Interest on behalf of private equity confirms my long held belief that on paper the new NTLI could be worth in excess of $100. I think the Virgin deal will get done and will add value and the removal of Duffy tells me that the Board wants the stock to do better. Add it all up and despite the move up, NTLI shares still look good.