France Telecom stages attack on UK market as CWC is carved up

News Analysis: NTL's audacious pounds 8.2bn swoop will transform the telecoms and media sectors
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The Independent Online
FRANCE TELECOM yesterday launched a major assault on the UK telecoms market by putting $5.5bn (pounds 3.5bn) behind NTL's pounds 8.2bn acquisition of the residential cable operations of Cable & Wireless Communications.

In a related transaction, Cable & Wireless continued to recast itself as a business telecoms provider with the buyout for pounds 5.3bn of CWC's business and data services unit, formerly known as Mercury Communications. C&W had owned 53 per cent of CWC.

NTL, the upstart, Nasdaq-listed cable operator founded in 1994 by youthful American business executive Barclay Knapp when Britain had more than two dozen cable companies, will own networks passing 12 million homes - or just over half of all British households. At a stroke, NTL will become the most potent threat yet to British Telecom for telephone customers and BSkyB for multi-channel television subscribers.

That, of course, was not lost on an upbeat Mr Knapp, 42, as he reflected yesterday on the cable industry's dramatic rebound from being the butt of widespread ridicule to today's stock market darling. "Over the last year cable has climbed up to knee, if not waist, level with Mr Murdoch and Sky," Mr Knapp said.

Aside from confirming Mr Knapp's arrival as one of Britain's most powerful media bosses, yesterday's deal also puts NTL in the driving seat to dictate merger terms to its rival operator Telewest, the only other remaining cable company. Mr Knapp said that talks with Telewest, of which Microsoft holds 29.9 per cent, would run "in parallel" with efforts over the next seven months to conclude yesterday's agreed purchase.

For pounds 8.2bn in cash and shares, NTL will get the residential cable networks of Cable & Wireless that pass 4.3 million UK homes. It also inherits franchise rights to areas with another 1.7 million households where roads have yet to be dug up to install cable networks.

After the deal, so-called "New NTL" will service over 2.1 million telephone customers and 2.2 million cable television subscribers with 1.5 million households taking both services. The merged company will have annual revenues exceeding pounds 1.2bn, a figure analysts expect to grow rapidly on the back of rising Internet use and growing consumer appetite for cable television.

But that demand is likely to mean "New NTL" will not generate significant profits for some years. Heavy capital spending on providing digital set- top boxes and new interactive services, while also extending networks to unserved areas, is expected to dent cash flow for years to come.

C&W will finance its part of the deal by issuing pounds 2.5bn of new stock as well as assuming pounds 1.2bn of existing debt.

This part of the transaction, with C&W essentially buying out part of itself, required the approval of independent directors led by Sir Bryan Carsberg, the former director- general of the Office of Fair Trading. Acknowledging the complexity of the transaction, he said the valuation of the business telecoms service was based on discounted cash flow calculations and scrutinising comparable transactions.

The fact that NTL was able to do any deal testifies to Mr Knapp's determination and resourcefulness. Less than a month ago, he was deemed to have little real chance of outmanoeuvring Telewest, which had been in talks since March about securing a takeover of C&W's residential cable business. As the clock ticked down, Mr Knapp engineered a strategic alliance with France Telecom that eventually agreed to provide backing of $5.5bn.

That hefty cash injection proved invaluable in tempting Cable & Wireless away from a deal with Telewest and its powerful backers, Microsoft and Liberty Media, a unit of US telecoms giant AT&T.

Prior to that Mr Knapp, while widely admired for the cheerful, entrepreneurial vigour that characterised NTL's approach to the British cable market, had seemed unlikely to have the necessary funding to broker a takeover. Cable & Wireless, long criticised for having too many widely diverse assets over which it exercised only fleeting control, was loath to surrender control of its cable unit for a minority stake in a highly leveraged, US-based company.

For France Telecom, the linkup with NTL is by far its biggest foreign investment. The former state-owned company will emerge with a near-25 per cent stake in NTL, although Michel Bon, its chairman and chief executive, said yesterday that the holding could rise to 34 per cent after 2002.

The move into Britain comes less than three months after the break-up of a France Telecom-Deutsche Telekom alliance, which foundered when the latter made an unsuccessful bid for Telecom Italia. That still rankles with Mr Bon. "I suppose when something is killed it is dead," he told reporters yesterday, referring to the pact with his erstwhile German partners.

The rationale for yesterday's deal, according to Mr Bon, is that the UK is Europe's second-largest telecoms market with annual revenue of pounds 24bn. He suggested that figure would jump by50 per cent or more by 2003 as Britain's lead from having first liberalised telecoms services would continue to be reflected in rapid sales growth for market sectors such as Internet data, international traffic and mobile.

Mr Bon, it appears, has also become a convert to the mantra of digital convergence, long a staple of the discourse of UK cable executives. In essence, convergence holds that increasingly high-capacity fibre optic networks will facilitate a digital coming together to allow for the common transmission of telecoms voice and data services with cable television, as well as new features like movie videos on demand.

That multi-media convergence is now within sight of becoming reality is evidenced by British Telecom's renewed efforts, likely to be confirmed next month, to launch high-capacity digital subscriber lines throughout Britain over the next three years. Combined with yesterday's doubling in size of NTL, and its likely absorption of Telewest in the months ahead, the UK is well placed to benefit from the rise of the information economy into the next century.