Financial engineering key to NTL bid

The cable group NTL could buy ITV for the equivalent of just 50p a share by using its vast tax losses against future profits at the terrestrial broadcaster, according to City analysts.

The financial advisers to the two companies, Lazards for ITV and JP Morgan and Goldman Sachs for NTL, met yesterday. Goldman's private equity arm made an unsuccessful 130p-a-share bid for ITV in the spring of this year, though it is the bank's investment banking division which is advising NTL.

NTL made an approach to ITV late on Wednesday this week, an initiative that leaked on Thursday.

ITV's board is likely to consider the approach over the weekend, possibly by conferring over the phone. It is thought that the NTL offer will be cash or mostly cash, which would involve the already highly indebted NTL taking on massive debt.

The tax advantages enjoyed by NTL would not be available to any private equity bidder for ITV and are highly unlikely to be available to any rival trade buyer. NTL has a total of £32.6bn in tax losses, including £13.1bn in capital allowances which could be used against profits from acquisitions.

According to analysts at Merrill Lynch, the net present value (NPV) of the taxes that ITV would not have to pay under NTL ownership would be worth up to £2.6bn, or 70p-a-share. That would mean that an NTL bid with a headline value of 120p-a-share, for instance, would actually cost just 50p a share, or £2bn.

Julien Roch, of Merrill Lynch, said in a research report: "We calculate that the NPV of ITV taxes is worth £1.0bn over 2007-2016 (using an 8.5 per cent discount rate). If you actually add a terminal value (taxes growing at 3 per cent) then ITV taxes would be worth £2.6bn."

NTL's current gross debt is £6.2bn. According to the Merrill Lynch calculations, the terms of NTL's existing bonds allow the company to borrow up to 5.5 times the gross debt figure, taking borrowings to £9.5bn. Combining existing debt at NTL and ITV's gross debt of £1.1bn, leaves capacity for additional debt of £1.2bn, the bank said. After taking into account ITV's cash balances, that leaves a funding gap of £2.1bn for NTL to make up, Merrill Lynch said.

It is understood that NTL is not considering an equity issue, which means that it will have to rely on increasing borrowings, possibly by renegotiating the terms of its existing bonds.

Sir Richard Branson, NTL's biggest shareholder, with a 10.5 per cent stake, and Bill Huff, an American financier, who holds 7 per cent, support the bid for ITV. Although there was widespread scepticism in the City about the strategic rationale for the transaction, among media industry figures there was a warmer reception.

One television executive said: "ITV badly needs a diversification strategy. This would give them one. It takes them into pay [television] and broadband. For NTL, this would give them the UK's biggest [programme] production business and the biggest marketing tool."

By contrast, media analysts at Numis Securities said: "NTL is currently still integrating the NTL/Telewest merger and digesting Virgin Mobile. We view ITV as a group which faces significant challenges, not just cyclically but also structurally and competitively.

"Accordingly, a further distraction through a four-way combination of NTL/Telewest/Virgin Mobile/ITV could be the last thing that either group needs."

Some pointed to the sports television group Setanta as a much better fit, as this privately owned company has premium content - not least a significant share of Premier League football matches, from next year.

ITV shares closed at 111p, down 1p, valuing the company at £4.3bn.