NTL to buy rival Telewest

Cable operator NTL has agreed a long-awaited deal to buy smaller rival Telewest for $6 billion (3.4 billion pounds) in a move to compete more effectively with the likes of BSkyB and BT .

NTL said on Monday it is paying $23.93 — $16.25 in cash and 0.115 NTL shares — for each Telewest share, confirming a weekend Reuters report on the deal. It is also taking on 1.7 billion pounds of Telewest debt.

The companies, both listed on the U.S. Nasdaq exchange, have customers in about 5 million UK households, compared with nearly 8 million for BSkyB. The company will also be Britain’s second-largest residential telephone company behind BT Group.

NTL shares fell 2.2 percent to $65.34 and Telewest rose 0.5 percent to $23.06 on the Nasdaq exchange by 3:38 p.m. British time.

NTL Chief Executive Simon Duffy, who will keep his job, said the deal would allow the combined company to cut 1.5 billion pounds in costs, accelerate the launch of products such as video on demand, and mount an aggressive advertising campaign to win new subscribers for its “triple-play” offering of voice, TV and Internet.

He also signalled that NTL would keep Telewest’s Flextech content division, which includes channels such as Living TV and UKTV. Telewest had put Flextech up for sale prior to Monday’s announcement.

Channels like Living TV and UKTV are highly sought after due to the growing popularity of free-to-air television platforms such as Freeview, which recently surpassed cable in terms of UK households.

“In a TV market where our major competitor Sky uses content as a strategic weapon and where there is a big issue between free-to-air and pay TV … having strategic control of an asset of the quality and calibre of Telewest’s TV content — I think that’s something that we need to retain,” Duffy told Reuters TV.

Telewest had shortlisted bidders including BSkyB and pan-European television broadcaster RTL , which also owns Britain’s Channel Five, to go through to a second round of bidding for Flextech. The unit was expected by analysts to fetch as much as 1 billion pounds.

The BBC, a 50-50 joint owner of UKTV, has the right to buy out Flextech under a change of control clause, according to people familiar with the contract, but is unlikely to exercise that option.

The BBC declined to comment.

‘SORRY WE’VE TAKEN SO LONG’

The combination of NTL and Telewest had long been considered a foregone conclusion after both companies emerged from restructuring two years ago.

“Most of you have been writing about this for two years,” Duffy told reporters on a conference call. “Sorry we’ve taken so long to satisfy you.”

NTL and Telewest grew into the country’s largest cable companies during the Internet boom, but massive debt almost crushed them after they aggressively bought up smaller rivals.

The firms share many of the same top investors, including WR Huff Asset Management — led by New Jersey-based hedge fund manager William Huff — which owns about 17 percent of Telewest and 10 percent of NTL, and holds seats on both boards.

Under the terms of the deal, Telewest acting CEO Barry Elson will leave the company after the deal closes. NTL shareholders will own about 75 percent of the new company and Telewest shareholders 25 percent.

NTL and Telewest expect the deal to close in the first quarter of 2006 following approval by regulators and both firms’ shareholders. Analysts do not foresee significant regulatory opposition because their networks do not overlap, and the country’s TV, phone and Internet markets are seen as highly competitive.

As part of the deal, NTL plans to refinance its and Telewest’s existing debt and take on 1.8 billion pounds in fresh financing, giving the new company a total debt pile of 5.7 billion pounds.

Investors in the European high-yield market said it was possible that the whole of the 1.8 billion pounds of new financing could end up in the bond market.

“The assumption at the moment is that there will be 1.8 billion pounds worth of bonds,” said one of the investors.

One source close to the process confirmed a bond was likely, adding it would be launched some time next year after the deal closes.

Financing is being arranged by Deutsche Bank, Goldman Sachs, JP Morgan Chase & Co and Royal Bank of Scotland. Telewest was advised by Deutsche Bank and Rothschild, NTL was advised by Goldman Sachs.

(Additional reporting by Jeffrey Goldfarb and Richard Barley)