Last week, I re-entered NTL Incorporated (NTLI) from the long side after a several month absence. I outlined the rationale behind my decision to buy in this post but failed to provide a lot of numbers. So here goes…
NTLI has 283 million shares outstanding following a 2.5 to 1 split that occurred simultaneous to the closing of the merger with Telewest earlier this month. With the shares closing at $28.29 on Friday, the market cap is $8 billion. Aryeh Bourkoff of UBS is projecting yearend 2006 total debt of $10.4 billion and cash of $1 billion, leading to a total enterprise value of $17.4 billion. Without adjusting for NTLI’s net operating loss carryforward or its content assets, the shares are trading at 7.6 times estimated 2006 EBITDA and 6.9 times estimated 2007 EBITDA.
In 2006, analyst estimates call for EBITDA of almost $2.3 billion at current exchange rates (all of the company’s revenues are generated in British Pounds). Over 90% of EBITDA will come from the from the cable plant via the triple play offering of TV, telephony, and internet and the business and wholesale offerings. Content assets provide the balance of EBITDA. Unlike in the US, the UK cable industry has been a triple play offering since the plant was built out in the 1980s. In fact, telephony is the largest revenue generator for NTLI, producing approximately 30% of revenue. Cable TV is the second largest business at about 20% of revenue, with cable internet next at 15%. The remainder of revenue is generated by business services, content, and sales of network capacity to other carriers….

Overall, revenue growth is projected to be quite modest starting with growth near 5% in 2006 followed by a steady deceleration toward just 1% growth by 2010. Essentially, analysts are looking for subscriber growth in the low single digits and stable ARPUs. High speed data is the revenue growth driver with growth of 15-20% projected in 2006 before it slows to single digits in 2007 and beyond. Telephony is the drag on growth as the competitive environment with mobile and other wireline providers is causing reduced minutes of use and lower monthly bills. Cable TV will continue to experience a loss of analog subscribers who are replaced by upgrades to digital service. The operating plan for revenue and subscriber growth is to move to Telewest’s best practices and try to duplicate the outperformance of Telewest relative to NTLI over the past few years. Toward this end, most of the operating management of the new company came from the Telewest side with 17 of the top 20 executives either new to the company or from Telewest.
NTLI will generate EBITDA growth over the next five years primarily by cost synergies. Management has publicly announced a cost savings target of $425 million annually in 2008. Analysts indicate that recently management has suggested this target could be low and the full savings could be realized sooner. In 2006, NTLI is projected to produce revenue of $6.4 billion, so achievement of the full cost savings target would enhance margins 660 basis points before considering some added costs associated with merger integration. In fact, this is what analysts are forecasting with EBITDA margins rising from 35% in 2006 to over 40% in 2008.
Capital expenditures are expected to be flat at around $900 million so free cash flow should growth at a healthy pace if the cost-driven EBITDA gains occur. For example, Aryeh Bourkoff’s model calls for free cash flow of $527 million, $814 million, and $1.1 billion, respectively, over the 2006-2008 period. On a per share basis that works out to $1.85, $2.86, and $3.88. With the stock at $28, is it any wonder that private equity would be interested in NTLI?
As mentioned above, there is also value in the company’s NOL’s and content assets. NOL’s total over $1.8 billion, or more than $6 per share. The content assets will generate about $140 million in EBITDA this year. These assets come from Telewest and were for sale prior to the merger. At the time, bids appeared to be in the area of 12 times EBITDA, about 5 multiple points above the current trading level of NTLI shares. In theory, this could provide another $2.50 per share of hidden value. It does not appear that the content assets are currently for sale but that could occur in the future. Adjusting for both the NOL’s and content assets, NTLI shares are trading for 6 times 2006 estimated EBITDA and 5.5 times 2007 estimated EBITDA.
Finally, the company is still attempting to acquire Virgin Mobile. An offer is outstanding and analysts expect it to be consummated in April. It has been a complicated deal with Virgin’s majority shareholder, Richard Branson, highly supportive of the deal and willing to take a discount price relative to the minority public shareholders. Assuming the deal is completed, NTLI will enhance its competitive position as the entire company and all of its service offerings will be rebranded with the highly valued Virgin name. Additionally, the new company will be able to offer a quadruple play including mobile telephony, potentially improving the ability sustain revenues and subscribers in the combined wireline and wireless telephony business.
I hope this additional background helps you understand why I see so much value in NTLI shares.