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December 16, 2005

Lots of Activity at NTL This Week

NTL (NTLI) has traded up steadily this week, extending its gains since it announced it was going to purchase Virgin Mobile. The Virgin deal is still being negotiated and I expect it to be completed, however, this week's gains are due to more rumblings that private equity funds are interested in buying NTL after it completes or receives approval to complete its merger with Telewest (TLWT) in 1Q06 and news on a management change at the CEO level of the new company....

The Sunday Times in London reported last weekend that private equity was still interested, liked the Virgin deal, and did not feel the incremental $1.5 billion that would need to be raised was a problem. The article also noted that it was not clear how Richard Branson, who stands to own 14% of the new NTL upon closing of the Virgin and TLWT mergers, would react to private equity overtures. Pricing was not discussed but the same $10 billion figure was mentioned. As outlined previously, this must represent market cap of the new firm as debt alone will be over $8 billion. The Virgin deal will add to the current pro forma 110 million shares outstanding but I still think a private equity deal could be completed anywhere from $80 to $100 per share. I continue to view the interest of private equity as confirming the value I see at new NTLI due to the large free cash flow generation even in a minimal revenue growth environment. Cost saves alone, outlined and affirmed at last week’s UBS Media Conference, are worth $15 per share is they are fully implemented in 2008 and valued at just 5 times EBITDA. This represents over 20% of the current NTLI share price and should provide good downside support for the stock in the near-term that turns into upside as the deal gets approved and progress on realizing the synergies is met. Further revenue synergies are possible due to implementation of TLWT best practices (TLWT has outperformed NTLI over the past year), possible rebranding under Virgin (considered one of the top brands in the UK), and reduced move churn as customers relocate between NTLI and TLWT franchise areas. Access to Premier League football could also help the combined company although sports rights are always tricky from a profit perspective.

Yesterday, NTLI announced that CEO Simon Duffy would be pushed aside into a strategy role and a new CEO with operating experience at Comcast would be brought in to lead the integration with TLWT. The Street does not like Duffy and blamed him for NTLI's poor performance in the past year, so a management change is a positive as far as the stock is concerned.

NTLI also issued its proxy for the merger yesterday. I saw nothing in the numbers that was different from what the company and analysts have been saying in public. The deal was restructured to be TLWT buying NTLI but the terms are same and there is no economic impact from the change. The change was necessary to avoid giving the BBC an option to purchase some of TLWT's content assets that the newly merged company wishes to continue to own. I like keeping the content asset as they are valuable and could easily be sold later to the benefit of shareholders. They also represent a reason for private equity to be interested.

I still think NTLI shares can trade back to old highs in the mid-$70s and much higher if the company can produce some decent top line growth and thus build investor confidence in the sustainability of the free cash flow.

Posted by Steve Birenberg at December 16, 2005 09:28 AM in NTLI