Telewest paves way for mergers

BY MARY FAGAN

Industrial Correspondent

The UK cable television industry is braced for a wave of takeovers following the confirmation by Telewest, the largest company in the sector, that it will merge with SBC CableComms. The combined group, valued at pounds 2.3bn, will have interests in 31 franchises covering more than 4 million homes.

A spokesman for the Cable Communications Association, said: "This will give others the confidence to go ahead. We will see substantial consolidation in the industry over the next 18 months."

The announcement was regarded as positive for the industry, and in particular for Nynex CableComms, which is to make its stock market debut today in London and New York, raising an estimated pounds 440m.

Telewest, which raised pounds 380m through a flotation last October, said it had secured pounds 450m in fresh bank facilities to help to finance future investment in its television and telephony networks. Its share price rose by 5.5p to 169p, still well below the 182p flotation price.

The merger is in effect a takeover of SBC, owned by Cox Communications and Southwestern Bell of the US. The deal, which does not involve exchange of cash or equity fund-raising, values SBC at pounds 679m and will leave its parents with 10 per cent each of "New Telewest".

Telewest chief executive Alan Michels, who holds the same position with the new company, said: "I don't think there was ever any doubt as to whether consolidation makes sense."

Mr Michels said that SBC was the partner of choice because it encompassed the whole range of entertainment and communications services for homes and businesses. SBC, with franchises in the north-west of England and the Midlands, was also a good geographic fit for Telewest.

The partners say the merger will create economies of scale by increasing purchasing power in programming and in construction costs.

Where franchise areas are adjacent, it also allows for local telephone services that do not rely on BT or Mercury to transfer calls to the neighbouring area. SBC has already built about 40 per cent of its networks - slightly ahead of Telewest and better than the average progress in the industry. Mr Michels said this was a key factor. "Philosophically, we are in the business of building as fast as we can. Capital in the ground is worth more than what is in the balance sheet."

Some City analysts regard the cable industry as overvalued, as it is not clear how successful it will be and how long companies will take to return a profit.

However, one analyst commented that despite long-term imponderables, "the period of weakness appears to be over and people are beginning to talk a lot more about the upside of the business. The Telewest/SBC deal will bolster other cable companies as well".

Cable is seen increasingly as the main rival to BT in local telephony. There are 900,000 exchange lines installed and 50,000 more being added each month.

The cable companies typically offer savings of 10 to 15 per cent over BT, with some also providing free or flat-rate off-peak local calls. BT recently pledged to step up its battle against cable.