Jeremy Warner's Outlook: Rush of private equity funds which promises to keep the City takeover game booming

NTL's ITV bid: an accident in waiting
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The Independent Online

One of the reasons the stock market remains so strong is that it is alive with takeover activity. To prove the point, two more FTSE 350 companies admitted yesterday that they had received takeover approaches - Resolution, the closed life fund operator, and Amec, the engineering concern which is a major player in the market for Private Finance Initiative projects.

For Resolution, the approach is simply a question of falling victim to the logic of its own business model. Resolution acts as an aggregator of closed life funds. The more such funds it can acquire and pass through its own back office systems, the more profitable it becomes. Economies of scale really count.

In such circumstances, it is perfectly logical that Resolution should itself become a target. Everyone can play at the game of life fund consolidation, and everyone in this industry is bound to be interested - from Prudential and Standard Life to Friends Provident and Swiss Re.

Amec, by contrast, is the target of financial, or private equity, buyers. This is a torrent fast turning into a flood. According to industry expectations, private equity will expand by a factor of two or three times again over the next 10 years as pension funds and others devote more of their money to this asset class. That means lots more private equity bids. It is only a matter of time before the industry gets bold and big enough to mount something truly sizeable - a Unilever, or even a BP, say.

On the whole, this is a good thing for public companies, helping to keep managements on their toes and ensure efficient use of capital. Where it becomes questionable is when existing management becomes involved in the private equity bid, creating an obvious conflict of interest which all too frequently disadvantages investors in the publicly listed company. This does not appear to be the case with Amec, which firmly rebuffed its American private equity bidders yesterday.

Yet there is still something faintly odd about the willingness of pension funds and other traditional investors to expand their exposure to private equity while at the same time reducing it to publicly traded equity. Does it really make any sense to be buying with one hand what you are selling with the other?

NTL's ITV bid: an accident in waiting

Other than as empire building, it is no easier to see the point of NTL's mooted takeover bid for ITV after a weekend to think on it than when the idea was first suggested last week.

The word on everyone's lips is "convergence" - the idea that differing media platforms would gain some benefit by being run in a unified manner by the same management team.

The theory is a reasonable enough one. Media is made up of content and distribution. Marry the content with an array of different distribution platforms, and you should be able to get a more profitable overall result - again in theory. In this regard, ITV's content and production capabilities if put together with NTL's cable network and broadband subscriber base would seem a near-perfect combination.

Great in theory, yet in practice the synergies of convergence tend to be quite limited in scope. BSkyB has managed to achieve some unity of purpose by crunching together satellite distribution with monopolised sports and film content. There is also some evidence of News Corp achieving similar results in the US with Fox.

Yet the structure of the UK market is a completely different one and there is little reason to suppose that even ITV's back catalogue would very much help NTL in the pay-TV arena. There may be some marginal benefit in placing ITV1 and its sister channels further up NTL's electronic programme guide, but is this really worth the effort of merging?

In order to persuade people to pay for their TV, there must be a compelling content proposition that cannot be accessed in any other way, such as BSkyB's monopoly of Premiership football rights.

The opportunities for cross-promotion would also be limited by communications and competition regulation designed to deliver a level playing field in media access to ITV's promotional opportunities. Regulators might insist that even the supply of content to NTL's pay-TV interests be at arms length on the same basis as it is supplied to everyone else.

I'm told that one of the reasons why Michael Jackson, the former Channel 4 chief now working in the US for the media tycoon Barry Diller, is prepared to come in and run ITV for NTL, but is not apparently interested in the vacant CEO's job at a standalone ITV, is that he understands these convergence arguments better than any. Without NTL, ITV is condemned to swift death by analogue switch off.

Even so, I remain sceptical. Running a telecoms network poses a very different set of management challenges to that of advertising-funded, free-to-air broadcasting. It is not clear that NTL is yet up to the task of even managing its own business, let alone that of a completely different one.

There's little doubt that ITV has been poorly managed, or rather, under-exploited. ITV has yet to make decent use of its back catalogue. Even Friends Reunited, a potentially highly lucrative social networking website with obvious international potential, has been left to wither on the vine since ITV bought it.

Could NTL possibly do any worse with these brands? It is hard to imagine it could. But again, does ITV really need to be absorbed within a cable company to bring about improvement? I'm not convinced. The only level on which media conglomerates make any sense is as hedging operations; if one part of the operations doesn't seem to be working, there should in theory always be another which is thriving.

There is something curiously counter-intuitive about meeting the challenge of fragmentation of the media landscape by merging into ever larger media conglomerates.

In NTL's case, the ill-defined logic of pursuing ITV combines with what is likely to be a highly dangerous financial structure. NTL already has quite enough debt, despite the recent, extensive refinancing of UK cable. To take on the extra £5bn needed to buy ITV will only recreate the financial instability which has sunk the British cable industry in the past. It seems scarcely credible that anyone would want to do this so soon after the lessons of the last road crash. If nobody much cares that NTL's debt and equity holders once again stand to lose their shirts, they should perhaps care about what such a mountain of debt would do to the future of ITV.

Already stretched programming budgets will have to be cut to the bone to service the bankers. It is hard to see why advertisers, already up in arms over ITV's growing inability to deliver mass-market audiences, would support a capital structure likely further to undermine ITV's ability to compete with the BBC and BSkyB. If NTL were to pay all cash for ITV at, say, 120p a share, it would create a combined company with debt around 6.2 times earnings before interest, tax, depreciation and amortisation, assuming no revenue synergies.

This is not completely off the scale by the standards of some recent overseas cable transactions. The difference is that, with Sky and the BBC sitting there in the middle, the UK is a much more competitive media landscape, and that advertising revenues are falling at ITV, and NTL is losing subscribers.

I'm sorry, but I just don't get it. If NTL can come up with the cash, then it will in all probability succeed. Shareholders are so desperate, they'd accept any cash exit at a credible price. But the deal will almost certainly end up value destructive. Quite apart from the lack of obvious synergies, there is also the execution risk.

NTL has not yet fully integrated even Cable & Wireless Communications, let alone the more recent acquisitions of Telewest and Virgin Mobile. There's still no unified billing system, and the company is incapable of micro-billing across the network for pay-per-view. That hardly bolsters confidence in management's ability to fuse successfully with ITV. No wonder ITV's competitors are rubbing their hands with glee. Reasonably, they anticipate years of chaos and further decline.