What's NTL's game in bidding for Newcastle

News Analysis: Although not a household name, the Premier League predator is the UK's third largest cable operator
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The Independent Online
WHEN NTL yesterday emerged as the mystery bidder for Newcastle United FC, many people's first response was: who is NTL?

Since the troubled Premier League football club revealed on Monday that it had received a takeover approach, a whole host of large corporations - including Sony, Time Warner, Carlton and Granada - had been mooted as possible buyers. But the cable operator, whose shares are listed on the Nasdaq exchange in the US, did not figure on the radar screen.

This is a surprise because NTL has probably been the most acquisitive British media company of the past few years. Ever since Barclay Knapp, its energetic American chief executive, founded the company as Cabletel and started buying up local cable television franchises in the early 1990s, he has been doing one deal after another.

This year alone, NTL has pulled off the acquisition of three cable operators - two of which were unveiled on the same day - with a combined value of roughly $2bn. At the same time it has invested in the consortium to run national digital radio.

This made NTL the country's third-largest cable operator with operations covering 5.2m homes in areas such as Teeside, the East Midlands and East Anglia. At the same time, it runs a national long-distance telephone service for businesses, and has a stake in some digital television channels.

Last year, NTL booked revenues of $491m, although these were accompanied by a huge $328m pre-tax loss. Nevertheless, the company's predominantly US investor base seem quite happy to look through all the red ink.

NTL shares have almost doubled in value this year capitalising the company at more than $2bn. And that's before you factor in a few billion dollars worth of junk bond debt which has helped to finance the spending spree.

So spending pounds 10m on a 6 per cent stake in Newcastle is small change for Mr Knapp. Even the pounds 160m cost of a full bid could easily be funded from NTL's existing facilities.

"We've raised $2.8bn dollars this year and we have well over $1bn in cash on the balance sheet," says Mr Knapp. A London share listing, which is planned for later next year, might provide the company with another opportunity to raise some extra cash.

On one level, NTL's move is a neat solution to a tricky problem. British Sky Broadcasting's pounds 625m bid for Manchester United has sent other media companies into a panic, worrying about whether they have to buy a club of their own to make sure they have access to television rights in the future.

However, many issues are still undecided. The Monopolies and Mergers Commission is investigating Sky's bid and its report, which is due in March, will set the parameters for the future ownership of British football clubs.

Meanwhile, the Office of Fair Trading is hauling the Premier League in front of the Restrictive Practices Court in January, accusing the football body of operating as a cartel by negotiating football television rights on behalf of all its members.

If the OFT wins its case, the current broadcasting deal with Sky will end immediately and all the clubs will be forced to negotiate their rights individually. While this might be very damaging for smaller clubs it suddenly makes the larger clubs much more attractive to rival media companies.

"Football is moving into a new era and by next year life is probably going to be different," says Mr Knapp "It is important we have a toehold in that future."

By taking a small stake in Newcastle with an option to buy the rest, NTL effectively stops anyone else from buying the club while not committing itself to the acquisition.

For Mr Knapp, the logic of the deal is simple. The advent of digital television - NTL is launching digital services for its cable customers early next year - makes it all the more important for television companies to have access to interesting programming.

Few programmes are more likely to get a television viewer to part with his hard-earned cash than a football match. This takes NTL from the business of distribution - pushing other people's television programmes over its wires - into the business of content, where it owns the rights to the programmes.

Mr Knapp says the company's main business will not change: "We aren't deviating from our role as a distributor and a communications company but we see a role for us in creating more opportunity and choice in television."

Nevertheless, other cable operators challenge NTL's approach. "They've just got their fingers in so many pies," says a rival. "They are trying to become a fully integrated company."

Meanwhile, observers are surprised by the club NTL has chosen. Since its flotation two years ago, Newcastle has been racked by scandal and controversy while failing to live to expectations on the pitch.

Meanwhile, there is no obvious overlap with NTL's existing operations. The company's closest cable franchise to St James' Park is in Teesside -- home to Newcastle's arch-rivals Middlesborough.

"We were looking for a national player and by any measure Newcastle was at the top of our list," Mr Knapp says, maintaining that the club's strong fan base make it a candidate for expansion in the UK and overseas.

But analysts point out that NTL would probably have to rely on rival broadcasters - such as BSkyB - to reach Newcastle fans all around the country, although it might be able to use SDN, the digital terrestrial television group in which it holds a stake, to screen pay-per-view matches.

"If they have to pay others to distribute the matches, where are the synergies?" asks one City analyst. "And then how do they justify the price they're paying for Newcastle?"

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