Last Friday, I purchased a new position in NTL Incorporated (NTLID – the D will be dropped shortly) across all Northlake client accounts. I think the stock has potential upside to at least $40 per share based on a successful merger with Telewest. The merger closed at the beginning of March. I define success as (1) the ability to produce several years of revenue growth in 3-5% range beginning in 2006 with growth at the high end of that range, and (2) the realization of cost synergies that will drive pro forma operating cash flow (EBITDA) margins from 35% in 2006 to 40% in 2008. If these goals are met, the company will produce about $2.4 billion, or $8 per share, in free cash flow over the next three years. With NTLI trading at $28.40 and debt at 4.6 times EBITDA, the free cash flow generation provides big upside to shareholders, and even if it falls short by $500 million still provides a cushion on the downside….

The reason I am stepping up NTLI now is because long-rumored interest from private equity players should come to fruition in the next month or two if it occurs at all. According to a recent research report from UBS cable analyst Aryeh Bourkoff, NTLI management has “acknowledged informal recent private equity interest.” Bourkoff’s report goes on to note that a March 1st UK Times Online report quotes NTLI Chairman Jim Mooney characterizing the value of private equity overtures as “not anywhere on the same planet.”
Following yesterdays’ news that Liberty Global (LBTYA) sold its slow growing French operations for 11 times 2005 EBTIDA, I can see where Mooney is coming from. If NTLI were to sell at 11 times 2006 EBITDA, the price would be $56, double the latest quote! I suspect that private equity views UK cable assets as more mature than cable assets in France, which would argue for a lower multiple at NTLI. Each multiple point is worth $8 at NTLI so there is a lot of wiggle room.
An educated guess places the informal interest from private equity in the mid-$30s or around 8.5 times EBITDA. This figure is unadjusted for up to $10 in hidden value for NTLI’s content assets and NOLs. As you can see, if a private equity deal emerges, the upside is substantial.
I think NTLI has fundamental support around $25-26 if private equity walks away. This sets up a favorable risk reward-reward tradeoff if my analysis that NTLI would fetch at least $40 in a leveraged buyout is accurate. Furthermore, I think the shares could reach $40 on fundamentals alone if current projections for 2008 turn out accurately.
I’ll post some more basic financial data on NTLI later this week. In the meantime, please scan through the Media Talk archives to review may previous postings on NTLI (there were a bunch of posts last December). You might want to review the more recent posts about a potential merger with Virgin Mobile as that possibility is on the front-burner. Finally, if you head over to Google News and type NTL into the search box, you will find it easy to read UK press reports about the company.