I woke up Sunday morning to learn that NTL Incorporated (NTLI) will be merging with Virgin Mobile, according to numerous sources in the British and American press. It appears this deal will occur roughly simultaneously with the closing of the NTL-Telewest (TLWT) merger early in 2006. The new company will be named Virgin and the entire quadruple play bundle of cable TV, high speed internet, wireline telephony, and wireless telephony will be rebranded under Virgin.
While effectively a merger, from a financial perspective NTLI is buying Virgin Mobile. News reports suggest the deal might be done for around $1.4 billion. Richard Branson owns 72% of Virgin and will take stock in the new company in return for his Virgin shares. He will become the largest shareholder of the merged entity at 14% of the equity. It is not clear yet what minority holders will receive. Pro forma market cap of just NTLI-TLWT is around $7 billion with another $10 billion in debt, so the deal is not difficult to swallow financially…

Clearly, the motivation behind the deal is strategic. NTLI has been plagued by fears about its growth rate, which is down to low single digits before merger synergies with TLWT. The competitive environment in the UK is fierce and NTLI’s TV and telephony businesses are under a lot of pressure from British Sky Broadcasting (SKY) and British Telecom. Early analysis from the British press views the Virgin-NTLI-TLWT merger as a shot across the bow of the Rupert Murdoch-controlled SKY. The new company plans to bid aggressively for the rights to Premier League football which SKY has held exclusively and has been a major competitive advantage in the TV battles. Sky has just entered the high speed internet business via a small acquisition and has no telephony products. The British press views BT as a clear loser because they have no TV and hamstrung by being the incumbent, legacy landline telephony vendor.
I don’t have any numbers yet and have to hop on a pane but with that caveat I think the market will like this deal from NTLI’s perspective. Branson is offering a major vote of confidence by taking shares not cash and providing the Virgin brand with which he is so closely associated. He is the face of the new company although NTLI CEO Simon Duffy will remain. The deal will create some excitement around the new NTLI, which the market has given up on due to growth and competition issues. Adding faster growing mobile and becoming the only company to complete the quad play addresses the growth issues, at least in the near-term. The new NTLI will offer one bill, four services, a hot brand, a way to address the fixed to mobile movement of UK customers, possibly Premier League football, scale, and significant free cash flow. Mobile is decelerating in Europe but I think in the near-term this deal will be received positively because it addresses the growth issues.
NTLI and TLWT are on the agenda at the UBS Media Conference. Assuming they don