Virgin and NTL plot £5bn merger

Sir Richard Branson is to expand into the British television market through an audacious £4.8bn merger of his Virgin Mobile phone company with the cable operator NTL.

The combined business will have 10 million customers and will pose a major threat to Rupert Murdoch's satellite TV company BSkyB, offering households fixed line and mobile telephony as well as broadband internet access and television.

The merger will be achieved by NTL making an offer for the whole of the publicly-quoted Virgin Mobile at a small premium to its closing share price last Friday of 311p. It will then rebrand itself using the Virgin name.

Sir Richard, who owns 72 per cent of Virgin Mobile, will emerge with a stake of around 14 per cent in the enlarged company, making him its biggest single shareholder. Minority shareholders will be offered either shares in the new company or cash.

NTL is expected to pay about 325p for each Virgin Mobile share, valuing it at around £840m. Virgin Mobile will issue a Stock Exchange announcement this morning confirming that it has received an approach from the Nasdaq-listed NTL. The deal is expected to take a few weeks to hammer out, but NTL and Virgin Mobile are hopeful of being able to announce an agreement around Christmas time.

The merger already has the blessing of Germany's T-Mobile, the owner of the cellular network used by Virgin Mobile, but it will also need the support of the Virgin Mobile board and its minority shareholders.

The deal has been kept a closely-guarded secret for the last nine months since NTL's chief executive Simon Duffy first approached Sir Richard proposing a merger. Tom Alexander, the chief executive of Virgin Mobile, only became aware of the deal last Friday.

Mr Duffy will become chief executive of the new merged company. It is hoped that Mr Alexander will also stay on in a senior role. One source close to the talks said that the merger would not lead to significant job losses.

The deal is conditional upon NTL completing the takeover of the rival UK cable operator Telewest, which was announced in October. That merger will create a cable company valued at around £4bn with £3.4bn of revenues and 5 million customers, including 4.3 million fixed line telephone subscribers, 3.3 million TV subscribers and 2.5 million broadband subscribers.

The merger with Virgin Mobile will bring in 5 million cellular customers and make the combined company the first in the UK to offer the "quadruple play" of entertainment, broadband and fixed and mobile telephony. In the US market, several players already offer this four-way package including Sprint, Nextel, Comcast and Verizon.

BSkyB has just under 8 million pay television subscribers and recently added telephony to its package by buying the fixed-line company easynet. But the NTL/Virgin deal will increase the pressure on its chief executive James Murdoch to do a deal with a mobile operator.

The Virgin/NTL merger comes as the pace of convergence between telephony, TV and internet continue to quicken. Virgin Mobile is already conducting trials with BT enabling subscribers to watch TV programmes on their handsets. O2, the mobile network which recently agreed to a £17bn bid from Spain's Telefonica, is running similar trials.

NTL already has links with Virgin. It owns Virgin.net, the company's broadband internet service, having bought out Sir Richard's stake in the business earlier this year. Investors have been pressing NTL for some time to explain how it plans to expand into the mobile market. Virgin Mobile, meanwhile, has been the subject of frequent bid speculation, helping its shares rise 60 per cent from their flotation price of 200p when the company went public in July last year.

A source close to the deal said the merger had "compelling logic" as it would marry Virgin's skills in marketing and customer management with NTL's enlarged customer base. "Richard has been keen to do something like this for a long time. When NTL made the approach it only took 35 seconds to conclude we wanted to use the Virgin brand to expand into television, but it has taken nine months of talks to get near to a deal."

Sources close to the negotations played down suggestions, however, that the merged company would go head to head with BSkyB by bidding for the rights to screen Premiership football.

Virgin Mobile is being advised by Morgan Stanley and Goldman Sachs is advising NTL. Neither Virgin Mobile nor NTL would comment.