Speculation reemerged two weekends ago that the NTL-Telewest (NTLI-TLWT) deal may be intercepted by private equity investors. As reported by the UK newspaper The Sunday Express, Ajax Partners is considering joining a group of private equity firms with deep media experience that had previously been rumored to be interested in the deal. The original group first came to light when the Wall Street Journal reported on it in early October. At that time, I wrote on StreetInsight.com that this validated the value that existed in the merged entity….

The article mentioned a bid would be valued at over $12 billion at current exchange rates. Pro forma debt of the new company is over $10 billion, so apparently this figure is the value that would accrue to shareholders. If so, the price per new NTLI share would be $108. While that might seem extreme relative to the recent NTLI price of $59.69, it is not that outrageous against current street estimates of EBITDA and free cash flow. For example, UBS analyst Aryeh Bourkoff has 2007 estimates, including synergies, of $2.7 billion and $870 million for EBITDA and FCF, respectively. If the equity in the new deal were valued at $12 billion, total enterprise value would be about $22-23 billion, equating to an EBITDA multiple of 8.6 times. The free cash flow multiple based on equity market cap would be 13.7 times.
Neither of these multiples is unreasonable relative to current public market values of global cable equities, or relative to recent public and private cable asset sales. Cable multiples in the UK are among the lowest in the world due to intense competition across the entire triple play bundle. Indeed, investors apparently are looking to the UK as they compress values of U.S. cable equities.
Each multiple point in a privatization transaction for NTLI-TLWT is worth more than $20 per share, so there is a lot of wiggle room in the ultimate value shareholders would receive in a deal driven by private equity investors. However, the numbers work for private equity at $108 which means anything up to that price is plausible. With NTLI trading under $60, shareholders don’t need private equity to bid at its top price to make out like bandits.
NTLI shares have barely moved up since this latest story which would seem to discount its validity. Part of the problem is that BSkyB had a lousy quarter that raised competitive fears another notch. The latest earnings report from NTLI was nothing to write home about, either, and contained continued troubling trends on ARPU, which is viewed as a proxy for the current and future competitive environment. However, TLWT reported a solid quarter last week.
This latest news increases the chances I’ll buy back the NTLI shares I sold in August. Downside support seems secure with private equity sniffing around. The NTLI-TLWT deal is scheduled to close in the first quarter of 2006, and the latest article suggested nothing was likely from private equity before that time. In the next few weeks the new company should issue a proxy further detailing projections and synergies. If those numbers align with current analyst estimates, entry before year end seems like good timing as support from the excellent economics of the merger will be confirmed.