Will NTL/Telewest’s combined might pay off?

Following the long-awaited merger of the UK’s biggest cable company NTL and rival operator Telewest, the combined entity should be able to mount a more serious challenge to the market leadership of BSkyB and BT.

While analysts agree the combination of NTL and Telewest was “logical” and “inevitable”, experts wonder whether this will be a match made in heaven, or merely a marriage of convenience to save cash and cut costs. One media insider says: “There will be synergies, and the top-line view is that it is sensible to bring together two geographically different companies into one operation. It will not be plain sailing. The company will still have to count the pennies.” Yet to be renamed, the combined business will carry a pro forma debt of &£5.7bn.

Recent speculation surrounding the merger has centred on the sale of Telewest’s Flextech digital television business. The BBC is said to be ready to swoop on the business, which is already a 50-50 joint venture with BBC Worldwide that includes the UKTV channels. But Simon Duffy, NTL’s chief executive, who will head the group, suggests that Flextech remains a “key focus”.

Since Monday’s announcement, Duffy has also spoken of his intention to “prise Sky’s sticky fingers” off the broadcast rights for Premiership football, suggesting a renewed intention to tackle the broadcaster’s subscription base and move further into content provision as well as distribution.

Combined, NTL/Telewest will have almost 5 million subscribers, 3.3 million of whom are digital TV customers, well behind Sky’s 8 million base. Anthony de Larrinaga, media analyst at SG Securities, warns: “If you’re going to take on Sky and be a retailer, wholesaler and programme packager, it’s massively expensive and potentially high-risk. NTL/Telewest’s strategy is broader than just media, but I believe its proper position is data and telephony traffic, taking share from BT.”

The group will be the UK’s second-largest residential telephone business behind BT, but will have about 500,000 more broadband customers than its rival. Another insider believes NTL/Telewest should be looking to secure new customers in broadband services: “Together, they are in a very strong position to compete as a broadband player. If it can get cable into houses through the Trojan horse of broadband, it can begin to convert customers from Sky, Freeview or BT.”

The deal also gives NTL/Telewest a national presence, with coverage in 55 per cent of UK households. Each previously operated on a piecemeal basis, covering different regions. The merger, say sources, will lead to more aggressive and consistent advertising, marketing and product development. “They’re both incredibly big players, each spending in the region of &£25m a year,” says one observer. “But it’s all been on regional marketing. They will now be able to advertise on TV, and create a strong and consistent national brand, which is perhaps where they have struggled before.”

Duffy says the deal will allow the combined company to cut &£1.5bn in costs, accelerate the launch of products such as video on demand, personal video recorders, high- definition TV and better broadband services. No figures for redundancies have been given, although the company has committed itself to “eliminating duplicated activities”.

The merger is expected to be completed next spring, when the cable giant will hope its “point of difference” – the offer of telephony, broadband and pay-TV in one package – will attract new customers, while retaining existing subscribers.

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