NTL bid for ITV leaves 'em baffled

Merger not 'credible,' Merrill Lynch says; RTL denies offer

As investors on both sides of the Atlantic ponder cable group NTL's surprise £5 billion ($9.5 billion) bid for commercial broadcaster ITV (HR 11/10), RTL chief executive Gerhard Zeiler on Monday poured cold water on reports that Europe's biggest free-television player is putting together a rival offer.

"It's pure speculation that's in the papers — RTL is not in talks with ITV at the moment," Zeiler said, speaking at this year's PricewaterhouseCoopers European media leaders summit in London. But he refused to close the door on a potential deal.

"I don't rule anything out, but I'm not focused on it at the moment," Zeiler added.

RTL, which owns some of Europe's biggest commercial broadcasters, including M6 in France and the RTL channels in Germany, is widely thought to be a potential dance partner for ITV, having both the financial clout to make the deal as well as the commercial television expertise to run the troubled station.

Analysts and commentators here have struggled to see the logic in NTL's putative tie-up with ITV — described by one former senior ITV executive as "two drunks snuggling up for comfort against a harsh winter's night" — but some have suggested that NTL's first strike may force other potential bidders to show their hand.

"Is an NTL and ITV merger credible? We don't think so," Merrill Lynch analyst Julien Roch said.

"We find it difficult to identify key areas for synergy extraction ... and one of the biggest stumbling blocks to the merger is the sheer scale of integration issues it would bring on top of the already large amount of work being carried out at NTL (which is only part way through this summer's $1.4 billion acquisition of cell phone group Virgin Mobile)," he added.

In fact, the key driver for the deal would appear to be the tax breaks associated with NTL's £32.5 billion ($61.8 billion) in tax losses, which would enable a large part of the acquisition cost to be written off.

"The key part is the £13.1 billion ($24.9 billion) in capital allowances that can be used like operating losses to offset against profits and can also be used against the profits from acquisitions," Roch said.

NTL may yet have an ace up its sleeve, however, as InterActive Corp. content chief Michael Jackson — a former chief executive of Britain's Channel 4 — is understood to be talking about leading the combined venture, which would control an estimated 27.3% of U.K. audience share when combined with NTL's Flextech division. Jackson's reputation as a program maker and talent magnet would give NTL credibility it sorely needs.

From ITV's perspective, the takeover talks have further derailed its already troubled search for a chief executive. The situation is also complicated by the fact that chairman Peter Burt is understood to want to step down after just over a year in the post because of board disagreements over the hiring process.

"It makes it much more difficult for a new chief executive to come in. You could accept the job on Friday and be fired on Monday by (NTL chief executive) Steve Birch," one leading London financier said.

The ITV board's much-leaked search for a new CEO (to replace Charles Allen, who resigned in the summer) is believed to have former Ofcom chief executive — and former NTL U.K. managing director — Stephen Carter as the front-runner. UIP chairman and chief executive Stewart Till also is thought to be on the shortlist.

ITV shares continued to climb in London on the belief that NTL is preparing the financial ground to make a £5 billion ($9.5 billion) all-cash bid for ITV that could value the company at as much as £1.20 ($2.30) per share.

To secure the financing for such a deal, NTL would have to double its existing debt to more than £10 billion ($19 billion). The loss-making cable operator has yet to record a profit despite more than a decade in operation. It narrowly escaped bankruptcy proceedings three years ago, opting instead for lengthy Chapter 11 insolvency proceedings.

Even after emerging from its financial restructuring nightmare, NTL has failed to prosper. Last week, the cable operator reported that customers were deserting its services in droves, with more than 55,000 subscribers quitting the business in the third quarter of its financial year.

More damaging, NTL's share of the U.K. high-speed broadband market also is being squeezed as more competitors enter the sector. In the three months through Sept. 30, NTL saw the number of new broadband additions drop to 78,000, down from 104,900 in the previous three-month period.

Advised by Goldman Sachs and JP Morgan, NTL is understood to have spent the past few days trying to raise the necessary financing for a cash bid because ITV does not believe it can sell its shareholders the idea of swapping their stock for NTL's highly leveraged paper.
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