Once, they wanted to each other. Now is it trample all over wedding bells?

In 2000, NTL and Telewest were competing furiously in cable's dig for victory. But now, they may have to merge to dig themselves out of a hole. Tim Webb reports

The founder of NTL, Barclay Knapp, complained to this newspaper some five years ago that the problem with his cable company was that "we can stripline [lay cable under] people's front lawns, but we can't sell them a phone deal".

The founder of NTL, Barclay Knapp, complained to this newspaper some five years ago that the problem with his cable company was that "we can stripline [lay cable under] people's front lawns, but we can't sell them a phone deal".

Back then, NTL was consumed by the battle with its rival, Telewest, to become the cable king of the UK and the number-one provider of television, telephone and internet services to homes. And, in the all-out dash for growth and the roll-out of services, if that meant poor after-sales care and losing a few customers (in fact, it lost a lot) along the way, then so be it.

Fast forward five years, and the story has not quite turned out how he hoped. Continued poor customer service has given cable a bad name. Ed Shedd from Deloitte Consulting says: "Many people don't really take cable seriously in this country."

Cable TV, with around 3.3 million NTL and Telewest households to its name, is a distant third behind digital satellite (BSkyB with just under eight million) and digital terrestrial television (Freeview with almost five million and growing rapidly). NTL and Telewest, both of which nearly went bust after the dot-com bubble burst, cannot claim to be king of anything.

But cable could be about to make a comeback. Rumours that the two companies are preparing to join forces to create a £5.5bn giant are reaching fever pitch. Telewest has appointed investment bank NM Rothschild to advise it on a merger deal, it emerged last week. Companies do not bring in a blue-blooded investment bank such as Rothschild, whose expertise in media deals is well known, if they do not mean business. So will this deal happen - and will it signal a resurgence of cable?

It has always been a case of "when", not "if", NTL and Telewest combine. The most difficult question has always been "how". When NTL and Barclay Knapp were in their pomp, he would not entertain a merger with Telewest. Why would the soon-to-be-crowned king of cable need to link up with anyone? With mergers, there are always two people for each job in a newly created company, and Mr Knapp may not have got the top post. His then counterpart at Telewest, Adam Singer, was of a similar mind. Besides, the two groups were too busy gobbling up regional cable companies to have time to do more than eye each other greedily. Both men hoped that they could outmuscle their rival, and emerge as the dominant player to swallow up the other company.

In fact, both empires almost went out of business and Mr Singer and Mr Knapp were replaced within a year of each other. The companies were crippled by the £10bn-plus cost of laying cable networks across Britain, by their acquisitions and by the superior product and marketing from BSkyB.

NTL emerged from bank-ruptcy protection in the US in 2003, and a year later Telewest avoided going bust when its creditors agreed to a huge debt-for-equity swap, exchanging almost $4bn (£2.2bn) of debt for 98 per cent of its shares.

Trevor Brignall, the head of the telecoms and media practice at consultants Arthur D Little, comments: "Talks could have happened a long time ago, but they have been held back while the companies have refunded and restructured their balance sheets."

So what are the advantages of merging now? Analysts at invest- ment bank UBS estimate there could be annual cost savings of £200m from merging functions such as back offices, customer relationship management systems and call centres.

Because NTL and Telewest are founded on fragmented regional cable franchises, a lot will have to be done to integrate the companies' operations. Mr Shedd at Deloitte says that at one stage NTL had around 15 UK call centres; BSkyB, despite having more customers, has just one. The consolidation of the cable industry - for which an NTL/ Telewest merger would mark the climax - mirrors that of the old ITV network where each licence was held by a different company, he adds.

As well as saving money, a combined group would be in a better position to compete. For television, the two companies would have more buying power to purchase content. Since BSkyB, never one to make life easy for its rivals, is the main source for content, this would help them get a better deal - especially as Flextech, Telewest's content business, is to be sold.

For broadband, a combined company would be able to offer the service to 70 per cent of the market, and compete more effectively against broadband on BT's DSL lines, which is being offered by companies such as BT itself and Cable & Wireless's Bulldog.

The biggest attraction of cable for consumers is the "triple play" offering of television, internet and telephone services from one company. None of its rivals can offer this service. But the concept has yet to catch on: most of Telewest and NTL's customers take only one, or two, of these services. Analysts estimate that if consumers can be signed up to all three, each one would be paying more than £500 per year, compared to an average revenue per user for BSkyB of just over £380.

"Getting people signed up to all three services is the holy grail for cable," says Mr Shedd. Joining forces rather than competing against each other, NTL and Telewest have a better chance of making this happen.

Much work is still to be done before the two companies agree to merge. Whether it will be a marriage of equals - or, as analysts speculate, a takeover by NTL - is one issue. An industry insider says a merger would be similar to that of Carlton and Granada, where bankers talked diplomatically of Granada, the dominant partner, "merging over" its smaller rival.

Price is another issue yet to be settled, but because many shareholders are common to both companies, and because everyone is convinced the deal must happen, this should not be a problem.

Possibly the biggest potential obstacle concerns who will run the combined group - NTL's chief executive, Simon Duffy, or his counterpart at Telewest, Barry Elson. It has been reported that Mr Duffy has told friends he is prepared to stand down to smooth the way for the merger. But as one banker says: "This means he is probably looking for the job!"

CABLE'S LONG AND WINDING ROAD

NTL

1982: The Thatcher government announces plans to develop the cable industry in Britain. The Cable Authority is established a year later.

1990: The Broadcasting Act establishes 135 cable franchises, most of which are taken up by US firms such as Videotron, Comcast and Nynex.

1993: Barclay Knapp arrives in Britain with $25m (£14m) and a plan to buy up cable franchises. The government raises doubts over his firepower to develop the networks, so Mr Knapp raises a further $400m. He buys dozens of franchises through his company, International CableTel, which is subsequently floated on Nasdaq.

1996: International CableTel buys NTL, the engineering arm of the former Independent Broadcasting Authority. The company changes its name to NTL.

1999: Mr Knapp beats Telewest to an £8.2bn deal to buy the residential cable arm of Cable & Wireless. This division was formed by merging Videotron, Bell Cablemedia and Nynex.

2002: In April, NTL's shares fall to an all-time low and, the following month, the company files for bankruptcy protection with more than £12bn of debts.

2003: In June, NTL emerges from bankruptcy protection proceedings after lenders agree to swap $11bn of debt for stock. In August, a management restructuring sees Mr Knapp replaced by the chief operating officer, Simon Duffy.

2004: NTL sheds 2,000 jobs. Operating losses drop by more than 30 per cent.

2005: In January, NTL sells its broadcast division to an Australian bank, Macquarie. In May, NTL sells its Republic of Ireland operations to UnitedGlobalCom for €325m (£220m).

Telewest

1988: Four-year-old company Croydon Cable is bought by the American group United Cable.

1989: United Cable merges with United Artists Cable International.

1991: United Artists merges with its largest shareholder, TCI (now Liberty Media). A joint venture between TCI and US West is announced and the following year it is named Telewest.

1994: Telewest floats on the London Stock Exchange.

1995: Telewest buys SBC Communications, adding a further 1.3 million homes to its franchise.

1998: Telewest merges with General Cable and Birmingham Cable.

2000: At the height of the technology and media boom, Telewest buys content company Flextech for £9bn. At the time, the mantra in the technology industry was "content is king".

2002: Telewest's shares crash in July. Annual losses exceed £800m. In a restructuring, the managing director, Adam Singer, is replaced by the finance director, Charles Burdick.

2003: Telewest announces 1,500 redundancies.

2004: Creditors take over 98 per cent of Telewest stock in a $3.8bn deal.

2005: In a joint operation with NTL, Telewest launches its video-on-demand service in Bristol.

2005: Telewest hires investment bank Rothschild to advise on merger talks.

Dominic O'Neill