C&W in cable hunt

UK's largest player looks to buy more franchises as industry consolidat es

CABLE & Wireless Communications, the UK's biggest cable company, is in talks to buy more franchises as the industry heads for another round of consolidation ahead of the introduction of digital TV.

CWC said only that it would look at a cable company if the price were right.

The talks come after NTL agreed last month to acquire Comcast UK Cable Partners for $997m (pounds 604m), while US West Media Group said it may increase its 26.75 per cent stake in TeleWest Communications, the UK's number two cable company.

The industry is preparing for a shake-out as it faces increased competition and high costs to introduce digital TV. Cable has attracted fewer customers than expected, leaving financial backers unable to recoup their investments and unwilling to invest further.

"There is no doubt that there will be rationalisation of the key remaining companies," said Anthony Fry, managing director of corporate and investment banking at Credit Suisse First Boston in London.

Six companies dominate the UK cable business: CWC, NTL, Comcast UK, TeleWest, Comtel - owned by KPN NA, the dominant Dutch phone company - and General Cable, which is majority-owned by Compagnie Generale des Eaux of France.

They lack the economies of scale needed to take on new entrants, in particular the new digital terrestrial TV services to be launched by Carlton Communications and Granada by the end of this year. Any home with conventional TV will be able to receive its broadcasts by adding a set-top box.

The UK government deregulated the telecommunications market in the 1980s, paving the way for cable companies to sell both phone and television services. Consumers, however, did not rush to sign up for cable services, and financial backers have begun minimising their investments or withdrawing.

Comcast, the sixth-largest US cable company that owns 27 per cent of Comcast UK, joins Nynex, SBC Communications and Cox Communications in scaling back its UK operations.

Cable penetration in the UK is still only 22.2 per cent, slightly down on last year's 22.4 per cent, according to figures released by the ITC. That compares with around 45 per cent penetration in the US market for paid cable service.

That is reflected in the cable companies' stock prices. Comcast UK fell 23 per cent in the 12 months up to its agreement with NTL and was trading on Friday midday at $43.50 on the Nasdaq system. TeleWest, which last year cut one-quarter of its staff to save pounds 40m, fell 30 per cent in 12 months before recovering in February and March, and closed on Friday at 89.5p.

General Cable's shares fell 58 per cent to 81.5p before reports that it was in merger talks with TeleWest, and closed Friday at 137.5p in London.

The shares of companies expected be acquired or merge have rebounded: NTL has risen 38 per cent since the company agreed to buy Comcast. Comcast UK has jumped 36 per cent, while TeleWest is up 16 per cent since early February to 89.5p. General Cable is up 70 per cent

since 4 February. If successful, NTL's acquisition of Comcast would create the third-biggest UK cable company, with a total of 1.5 million homes that can access its networks, according to the Cable Communications Association.

The leader is CWC, whose cable networks potentially reach 3.7 million homes. TeleWest can access just over 3 million homes. Mirror Group - which has no cable network - is also interested in buying franchises once bigger groupings emerge.

Mirror Group , which agreed last week to sell its stake in Newspaper Publishing to Independent Newpapers, owns a news and entertainment channel, Live TV, that runs on cable networks.

While General Cable talks to TeleWest about a possible merger, TeleWest is itself talking to NTL, because it owns shares in Cable London and Birmingham Cable with Comcast and therefore has first refusal on Comcast's shares.

Without TeleWest's approval, NTL would not be able to buy Comcast's franchises.