Microsoft backs NTL to create UK cable force

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MICROSOFT, the American software giant, yesterday made its first direct investment in the UK cable industry by injecting $500m (pounds 300m)into NTL in return for a 5 per cent stake in the acquisitive media group.

The move is part of a broader alliance between NTL and Microsoft that will see the two companies co-operate to develop broadband services to be delivered to residential customers at high speeds.

The step is a boost for NTL, which has issued huge amounts of debt in its quest to build a national cable network in the UK. Last year, the company spent over $2bn taking over rival franchises. It also took out an option to buy a controlling stake in Newcastle United, the Premier League football club, from major shareholder Douglas Hall.

Microsoft's move sparked a renewed frenzy of speculation about likely consolidation among Britain's cable operators. City analysts have long insisted that the UK's three existing groups - NTL, Cable & Wireless Communications and Telewest - will eventually merge.

NTL said it had been approached by Microsoft, which is looking for ways to invest the huge cash flow it derives from sales of its Windows operating system. "Microsoft has a lot of money to invest and they were looking for an investment where they could work with someone who was developing new products," said John Gregg, NTL's managing director for corporate development and finance.

Under the terms of the deal, Microsoft and NTL will set up a technology group to guide the development of new services, including high-speed Internet access. In return, Microsoft will invest $500m in NTL's convertible preference shares, convertible at $100 a share. It will also receive 1.2 million warrants allowing it to buy NTL stock at $84 a share. If all the instruments are converted into shares, Microsoft would be left with a 6.2 per cent shareholding in NTL.

On Nasdaq, NTL shares soared $12.19 to $79.875 by midday on the announcement. In London, shares in CWC rose 27.5p to 780p, while Telewest gained 23.25p to 250.75p as investors speculated that further consolidation was in the pipeline.

Telewest is seen as a prime target because TCI, the US cable group, is expected to sell its stake following its takeover by AT&T. "Consolidation moves are afoot," one analyst said. "But the question is on whose terms."

Microsoft has already made similar investments in the US. Several years ago it sank $1bn into Comcast, a US cable operator, in an attempt to encourage investment in US cable networks. "This is an endorsement of cable as the best network into the home," said Mr Gregg.

All three UK cable operators are due to launch digital cable systems this year. Apart from offering a multitude of television channels, these will also allow customers to use their televisions to surf the Internet at high speed. Experts reckon digital cable will offer Internet access at up to 100 times the speed of a normal modem, making possible truly interactive services such as home shopping.

News of Microsoft's move is likely to infuriate NCI, the software joint venture between Oracle and Netscape - two of Microsoft's bitter rivals. Just last month NTL said it would use NCI's operating system in its digital set-top box decoders.