Jeremy Warner's Outlook: Why persist with a bid idea that's getting such poor ratings? NTL should pull out

Private equity: old ideas in new clothing; David Sainsbury exits, a job well done

Day two of the tragi-comic farce which is NTL's mooted takeover bid for ITV and the plot gets no better. In the latest episode, Sir Richard Branson, NTL's largest shareholder, is said to be actively pushing the deal so as to create a new media champion to take on Sky and the BBC.

Has Sir Richard lost all sense of reality in his dreams of empire? The last thing NTL should do is go head to head with Sky, for there is nothing Rupert Murdoch enjoys more than a fight, and there is little doubt who would end up getting squished in any such contest. The best NTL can do is seek a peaceful coexistence.

I've been running the numbers, and it is still impossible to see how NTL could come up with a credible bid, even assuming it can get the thing through regulators. In this regard, the takeover would face an almost certain reference to the Competition Commission.

Competition regulators have so far been willing to allow mergers within broadcast platforms, but there is no precedent for them sanctioning them between platforms. Putting NTL and ITV together would result in the cable monopoly coming together with the dominant commercial provider of free-to-air terrestrial TV. Regulators would want to explore the implications at length. Advertisers are also likely to be concerned.

Yet it is financing the deal that is likely to prove the chief stumbling block. NTL is already a heavily indebted company. It could perhaps afford to take on another £2.5bn of debt, assuming private equity-style leverage of 6 to 7 times earnings before interest, tax, depreciation and amortisation, but no more. The lenders simply wouldn't wear it. This is a long way short of what's needed to bid in cash for ITV.

NTL is making great play of the billions in tax losses it could apply to ITV's profits. ITV pays about £100m a year in corporation tax. In theory, NTL's available tax losses would remove this liability for decades to come, an eventuality which Merrill Lynch thinks might be worth as much as £2.5bn of value.

Yet any such value will take years to recognise and in the meantime NTL would have to put up the money. In any case, deals done on the merits of tax advantage alone nearly always turn out to be rotten. Given the size of the loss to the tax base, the Revenue will fight long and hard to prevent it being realised.

There's nothing to stop NTL offering paper, I guess, but few British investors would want to take it. Quite apart from the fact that the company is registered in Delaware and listed on Nasdaq, they'd only be swapping equity in one lame duck for the same thing in another.

Alternatively, NTL could be reversed into ITV, but here again, it is hard to see what would be in it for ITV shareholders. I may be forced to eat my words, but I don't see NTL's assault on ITV lasting more than a couple more episodes. It's a terrible concept on almost every level, with all the pulling power of Celebrity Love Island, and thoroughly deserves to fail.

Private equity: old ideas in new clothing

One of the biggest, but at the same time strangely unimportant, financial stories of the week was the FSA's decision to sound the alarm over the growth in private equity. It was the FSA's warning about a big private equity collapse being inevitable that made the headlines, yet this was in fact the wrong message to draw from the FSA report. The prediction of casualties is in any case no more than a statement of the obvious. There are already lots of failures in private equity.

The main conclusion was a less alarming one; it was that although the industry and its lenders needed greater surveillance, private equity and the debt leverage it employs don't pose a wider threat to the financial system. Only in extreme circumstances, such as a sudden and marked change in credit conditions, is there likely to be wider systemic damage.

This diagnosis is broadly shared by regulators in other jurisdictions. Virtually all of them take the view that although this is an area of explosive growth in the capital markets which they have to be interested in, there is as yet no great cause for panic. In other words, they are on the case - how come it took so long, guys? - but they don't see any particular need to do anything about it.

The upshot is that the private equity party continues uninterrupted. The police have been called in, but so far, they've not even asked for the music to be turned down. As it happens, markets are in any case likely to prove a more effective regulator of these activities than governments. As the FSA states, there will eventually be collapses, but rather than ushering in financial armageddon, the effect will rather be only to reign in the wilder excesses. All markets need the purging effect of failures from time to time to keep them honest.

Nor is there anything particularly new in the private equity phenomenon in any case. Every generation of financiers has its stars, those apparently capable of turning water into wine. In the 1970s it was Jim Slater and his like. For the 1980s read Lords Hanson and White, as well as Owen Green at BTR. These latter three masters of the universe used paper rather than debt to play the game, but the script was much the same.

Give us a business, any business, and by applying decent cost controls and management techniques we can unlock its hidden value. As it turned out, most of the success achieved by the old style conglomerates was down to the smoke and mirrors of acquisition accounting. When the fashion in investment turned away from conglomerates to the merits of concentrating on the knitting, many of these industrial goliaths turned out to be castles made of sand.

Today's conglomerates are the big private equity houses. Many of them already boast an Ali Baba's bazaar of different businesses that not even Lord Hanson would have dared house under one roof. The only common feature is that they are all pumped full of debt, which does indeed have a habit of concentrating managers' minds wonderfully.

To stay afloat, they must pare costs to the bone. Keynes may not have meant it in quite that way, but his famous adage about looking after the short term and the long term will take care of itself has become the management mantra of private equity.

As with the conglomerates of the 1980s, there'll be an almighty shakeout come the next major downturn. Much of the present explosion in private equity activity is the creature of today's extraordinarily loose monetary conditions. As long as money is cheep and plentiful, it makes sense to borrow in pursuit of undervalued equity. The return that can be made on the equity is infinitely greater than that on the debt.

Quite what happens when less benign credit conditions return has yet to be fully tested on the wrack of experience. Yet I suspect the private equity houses will prove more durable than the conglomerates. They've no more discovered the secret of turning base metal into gold than Lord Hanson, but their use of leverage and drawdown equity makes them a good deal more flexible than their forebears. Like it or loathe it, private equity is here to stay.

David Sainsbury exits, a job well done

As I'm sure he would readily acknowledge, David Sainsbury has proved a rather more capable government minister than he was chairman of J Sainsbury. He's made a real difference as science minister, winning more finance, fighting difficult causes, and hugely raising the profile of scientific study and application.

His decision to quit has much more to do with the fact that his mentor, Tony Blair, will soon be going too than the honours-for- loans affair. He also wants to devote most of his time to philanthropic causes. It's a nice idea, but speculation that he might be stepping down to pursue a private equity buyout of Sainsbury, where he is still the largest shareholder, is a long way wide of the mark.

That's not to say there won't be a bid. Despite the recovery in the share price under Justin King, the chief executive, it's still a possibility. Lord Sainsbury, on the other hand, is bound for the next three months by the conditions of the blind trust he vested his shares in when he joined the Government. He also rates Mr King highly and knows his own limitations. The last thing he would want to do is run J Sainsbury again.

j.warner@independent.co.uk