Flextech aims to bring pay-TV content to the Telewest party

NEWS ANALYSIS New combine to challenge BSkyB in interactive media

FOR A deal that was supposed to be announced first thing yesterday, the proposed pounds 9bn merger between cable TV groups Telewest and Flextech appears to be having an awkward birth.

It was 4pm before the market had a statement and even then it said only that talks between the two parties "are progressing". Formal notification is expected today after lawyers on both sides of the Atlantic have ironed out all the wrinkles.

What the deal will create, when it is eventually confirmed, is a combined cable television-pay TV group with 1.6m subscribers and access to more than 6m homes. More importantly, it creates a potentially serious challenger to the "Big Daddy" of the pay-TV market, BSkyB.

On the face of it, these two companies are nothing to shout about at present. Both have yet to record a profit. Telewest will only be number two in the UK cable TV market if NTL's takeover of Cable & Wireless communications goes through. And the value of Flextech's channels, which include Bravo and Trouble, a channel aimed at teenagers, is open to question.

So why are they doing it? The answer is that both companies need a deal. And both believe scale will be important as digital cable battles for dominance in the market for interactive services such as shopping and banking.

With the cable market clearly consolidating, Telewest needs to be able to negotiate from as strong a position as possible. Flextech, for all its innovation, is a relatively small player in the media jungle.

For Flextech, the merger will give its channels access to a far wider distribution base. Telewest gains access to Flextech's programming content which forms a major part of the basic packages on satellite, cable and OnDigital. But in the broadest sense this deal is about maximising cable's bandwidth advantages over satellite's more limited capabilities.

Digital cable technology is capable of pumping far greater volumes of digital data down its "pipes" than rival means of distribution.

Telewest is confident that as interactive television takes off the value of cable's rapid access will become a major advantage though it has given its satellite and terrestrial rivals a head start.

Flextech has developed Flextech Interactive which includes a channel called Scene One. This is an entertainment guide gives listings, and allows viewers the opportunities to book theatre and cinema tickets via an interactive keypad.

But there are potential rifts in this media marriage. One weakness is that it is not exclusive. Flextech will still be able to market its content to other players. But Telewest claims this is an advantage because it wants to develop nationally branded channels it can then distribute beyond its main franchise areas.

But perhaps the main weakness in the deal is the potential for management friction. Though Flextech is the smaller company, valued at around pounds 2bn to Telewest's pounds 7bn, it is expected to be Adam Singer, Flextech's chief executive, who takes the top job in the merged group. Tony Illsley, Telewest's chief executive, will be managing director.

The two are like chalk and cheese. Mr Singer is described by one analyst as "a pure media animal, hugely confident and a big talker". Mr Illsley is a professional manager, a quieter individual whose track record includes masterminding the development of Walker's Crisps for PepsiCo.

Analysts say Mr Singer was chosen because the merged group will need a figurehead with content expertise who is used to walking the media corridors of power. Can the two get on? "It will be an interesting show to watch," says one analyst. But, in many respects, this has been a deal waiting to happen. Both have common shareholders which have acted as "enablers" in the deal.

Liberty Media, controlled by John Malone, owns 21 per cent of Telewest and 6 per cent of Flextech.

MediaOne owns 6 per cent of Flextech and 29.9 per cent of Telewest which it has agreed to sell to Microsoft.

The merger is expected to be structured as an all-share deal with Telewest offering its shares in exchange for Flextech paper.

Telewest shares closed 26.75p higher at 340p yesterday. Flextech's shares edged 5p higher at 1215p.