Telewest merger with Flextech would challenge Murdoch grip

TELEWEST, the cable operator, and Flextech, the thematic television channels group, confirmed yesterday that they are in talks that could lead to the creation of a vertically integrated, pounds 10bn pay-TV giant potent enough to challenge BSkyB.

Analysts said a merger would illustrate the potential for linking Telewest's broadband cable network, which passes more than 4 million British homes, and Flextech's portfolio of thematic television channels. Flextech produces basic cable channels, such as Living, and is co-partner with the BBC in the development of pay-TV channels. It also produces various websites and interactive channels.

It is expected that Telewest will issue stock, worth up to pounds 2.5bn, to absorb Flextech, whose shares have jumped by around 40 per cent in the last two trading sessions. Telewest stock is up almost 20 per cent in the same period.

The likelihood of a deal being agreed is thought to be relatively high, although the talks were officially described as being "at an early stage". Adam Singer, chairman and chief executive of Flextech, is a former non- executive director of Telewest, while three other directors of the cable group, including Gary Ames, its deputy chairman, are on the media group's board.

"Telewest and Flextech announce exploratory discussions between the two companies as to ways of working closer together to develop their respective businesses," the companies said. "These discussions, which include the possibility of a combination of the two businesses, are at a very early stage and there is no certainty that any agreements will be reached."

A deal would represent the closing of a multi-billion pound circle opened in the late 1980s when John Malone, founder of Tele-Communications Inc, the US cable giant that is now part of AT&T, took controlling stakes in Flextech and then Telewest. Through Liberty Media - now the media content arm of AT&T - Mr Malone oversees a 37 per cent controlling interest in Flextech and a 21.6 per cent stake in Telewest.

A merger would see Liberty's stake in the enlarged group rise to about 30 per cent. That would place Mr Malone on an equal footing with Bill Gates, the chairman of Microsoft, which owns 29.9 per cent of Telewest.

Confirmation of the merger talks comes as shares in both companies have rocketed over 70 per cent since September. For at least three Flextech executives, including Mr Singer, Mark Luiz, finance director and Brent Harmon, managing director, the stock price surge will ensure multi-million pound incentive payments, since the scheme pays out on the average share price over the final three months of the year.

The merger talks highlight Telewest's growing concentration on building interactive television and e-commerce services. Last week, the cable operator said it would offer digital TV subscribers access to financial transactions, holiday bookings and other services through an interactive venture with partners such as Abbey National, First Choice Holidays and publisher Dorling Kindersley.

Yesterday Flextech sold a 38 per cent interest in TV Travel shop, an interactive travel operator, to Barclays Private Equity, valuing the business at pounds 52.6m. The deal, which will see Flextech retain a 49.5 per cent stake, also marked a return to form for Harry Goodman, the Intasun creator, who has a stake worth nearly pounds 3.5m.

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