ITV demands £5bn to back NTL bid

NTL's nerve will be tested this week with ITV set to demand that the cable operator bids at least £5bn before the broadcaster agrees to open its books.

NTL is thought to be ready to bid between 115p and 120p a share for ITV, valuing the company at about £4.7bn. But ITV shareholders are demanding that NTL at least matches the 130p that a private equity consortium led by Apax and Goldman Sachs offered earlier this year. Although the ITV board led by Sir Peter Burt rejected the approach, the Apax bid price is now seen as the benchmark against which any rival offers will be judged.

Nasdaq-listed NTL needs the approval of ITV's board to conduct due diligence as its financial backers would not support a hostile bid for the broadcaster. The structure of any deal to combine the ailing broadcaster with the burgeoning media company NTL is yet to be determined. Preliminary talks took place last Friday and further talks are scheduled this week.

NTL hopes to convince ITV to consider a bid of less than 130p as a result of the broadcaster's deepening financial woes. The broadcaster's prospects have deteriorated over the year with consensus profit forecasts around 20 per cent lower than in March, owing to rapidly declining advertising revenues.

NTL is understood to have arranged financing for the deal through its investment banking advisers Goldman Sachs and JP Morgan but an all-cash deal could increase the cable company's debts to nearly £10bn. NTL may also need to raise further funds to plug ITV's pension deficit of £320m.

NTL is already saddled with debt of £6bn after it acquired its rival Telewest for £3.5bn in 2005 and Sir Richard Branson's Virgin Mobile unit earlier this year for nearly £1bn.

However NTL is considered to be in a unique position in that it can use accumulated tax losses of £32.6bn against future ITV profits. Analysts calculate that this could enable it to pick up the troubled broadcaster for an effective price of 50p a share if it were to offer 120p.

Investors reaction to an NTL/ITV combination has been lukewarm although NTL has the support of its largest shareholders Sir Richard and Bill Huff, an American financier. The strategic rationale for integrating ITV into NTL is to combine the two companies' content production businesses and better exploit NTL's broadband, mobile and cable television assets.

ITV's social networking site Friends Reunited is also said to be of interest to NTL following Google's purchase of YouTube and News Corp's acquisition of MySpace. Friends Reunited, a site that puts subscribers in touch with old school friends, has withered since ITV paid £120m to acquire it almost a year ago.

NTL is set to rebrand its operations under the Virgin Media banner from next year and believes it can breathe life into the ITV brand. The broadcaster's main television station, ITV1, has struggled to maintain its viewing market share particularly among 18 to 24-year-olds.

Stephen Carter, an ex-NTL executive and former head of the telecoms and media regulator, and Michael Jackson, the former head of Channel 4, have both been touted as candidates to take over at ITV should an NTL bid succeed. ITV is currently without a chief executive following the departure of Charles Allen and the search for a successor is in disarray.