Europe's Largest Buyout Deal?

As Britain's first 'quadruple play' for telecom and video services, NTL is a hot private equity target

It could be the biggest buyout in European history. After a failed takeover attempt last year, a consortium of private equity players hopes it will score in its latest attempt to secure Britain's largest cable company, NTL, in a record $20 billion deal. Led by Rhode Island-based Providence Equity, the consortium includes U.S. private equity firms Blackstone and Kohlberg Kravis Roberts & Bain, and Britain's Cinven, according to sources close to the talks.

Informal discussions have been ongoing for several weeks, the sources say. The talks became more serious last week when the private equity group and NTL management began meeting formally. NTL, and its second-largest shareholder, Bill Huff, founder of Morristown (N.J.) -based W.R. Huff Asset Management, declined comment.

Just last month, Virgin Group founder Richard Branson became NTL's largest investor, securing more than a 10% stake in NTL in exchange for selling Virgin Mobile for $1.8 billion sale. Virgin says it has received no approaches from interested investors.


  If successful, Blackstone, KKR, and Providence will be topping their own record. Last year, the trio took part in what was Europe's biggest-ever leveraged buyout, the $15.3 billion takeover of Danish telecom operator TDC. The group is hardly alone. Worldwide, private equity groups awash with cash are in the midst of a huge buying spree.

Buyout funds raised $131 billion last year, double the amount in 2004. And there are signs that 2006 will even be bigger. Most recently, Australian retailing giant Coles Myer, owner of the Australian operations of Target (TGT) and K-Mart, is the target of a potential $18 billion bid from KKR—a record deal in that country should it go through.


  But the deals have been coming fast and furiously all year—and they have been huge. On July 24, Bain Capital, KKR, and Merrill Lynch Private Equity made a $33 billion deal to acquire HCA (HCA), the No. 1 U.S. hospital chain. That deal broke records, even taking into account the assigned debt.

Also in July, a group of private equity firms including Providence Equity Partners and Texas Pacific Group agreed to buy Spanish language broadcaster Univision Communications (UVN) for $12.3 billion. Earlier this year in Europe, KKR and Carlyle Group joined forces to secure the $11.6 billion takeover of VNU, the Dutch media company.

The NTL talks are part of an ongoing trend in which cash-rich private equity houses are targeting telecom, cable, and media assets. Because of their ability to generate steady streams of cash, cable companies are seen as attractive investments for private equity firms.


  Last year, for instance, Providence bought out its co-investors and announced plans to invest $643 million over the next three years to offer the triple-play of broadband, cable, and fixed-line phone services in Germany. Such investments have helped Providence surpass John Malone's Liberty Global as the main owner of European cable companies.

It's easy to see why private equity firms are circling NTL. Come September, NTL will be the first company in Britain to offer what is seen as the industry's Holy Grail: the so-called quadruple-play package of mobile and fixed-line phone service, broadband, and television.

For $75 a month, subscribers can get all four services bundled into a single bill under the Virgin brand. "This gives NTL a breadth, that at the moment, no one else can match," says Bob House, senior vice-president at telecom consultancy Adventis in London.


  Rivals, though, are hot on NTL's heels. Both BT and Rupert Murdoch's BSkyB are upgrading existing triple-play offerings. BT, Britain's former phone monopoly, which already offers a mobile plus fixed phone package, plans to expand the offering later this year to include digital TV and video-on-demand.

And in July, Rupert Murdoch's BSkyB unveiled a $757 million investment to offer Internet telephony and free broadband connections to its satellite television customers. Add to that the numerous rivals in each of the four markets in which NTL competes: broadband, television, and mobile and fixed telephony. "NTL is fighting a war on four fronts," says Ian Fogg, senior analyst at Jupiter Research in London.

That's why skeptics say any private equity deal could be risky. What's more, NTL remains heavily in debt and is losing customers. Last week, NTL unveiled second-quarter results showing it had lost a net 18,900 subscribers of its 4.9 million total. But the shaky performance has hammered NTL's share price, which has tumbled 20% over the last four months. That, industry observers say, has provided private equity players fresh impetus to strike.


  For NTL, a deal probably makes less sense. The company is still digesting its October merger with rival British cable operator Telewest and its recent takeover of Virgin Mobile. The company is not expected to be keen on any deal. It has said its share price is currently undervalued as the benefits from its quadruple play with Virgin have yet to be realized.

Indeed, when a previous private equity deal for NTL was squashed last October, Huff described the proposal as "preposterous" and encouraged NTL CEO Steve Burch not to deal with private equity firms. At the right price, though, even the most vehement critics might just be persuaded.

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