WHEN the NTL supremo Simon Duffy belatedly announced that the cable company’s Irish division was on the block early last month it was not only a confirmation of the worst-kept secret doing the corporate rounds but a final admission of failure.
Duffy said that while the company had not sought a sale, it couldn’t resist testing the market after being approached with some very tempting offers. The reality is somewhat different. Six years after paying €680m for Cablelink and running up enormous losses, NTL is only too happy to pack its bags, its promise of an integrated package — the so-called triple-play of television, internet and telephone — still a distant pipedream.
Those close to the due diligence process say a €100m infrastructure upgrade is the least it will take if the new owner wants to ensure the survival of the business, let alone see a return on the €300m asking price. The bulk of NTL’s cables have not been updated since the mid-1970s when the company was a semi-state entity owned jointly by RTE and the former Telecom Eireann.
“The cables are sagging like an old man, they are hanging like clothes lines full of water,” said Roy Anderson, the managing director of Cablecom, a firm specialising in the upgrade of cable and telecom systems. “Triple-play is off the menu: double-play is the best they can hope for, given the state of their network.”
Although NTL has a cable television market share of 71% and an 8.5% share of the existing broadband market in Ireland, it is believed that as many as 320,000 connections out of a total customer base of 348,000 may not be wired for full digital delivery and that only 20% have broadband capability.
A previous attempt to enter the telephony market has been abandoned and there is also likely to be additional cost in separating the Irish entity from its British parent.
These problems have not dissuaded several heavy hitting consortiums from joining the race for NTL.
By last week Goldman Sachs, the investment bank running the auction, had whittled them down to two preferred bidders: UnitedGlobalCom (UGC), a European cable group that also owns Chorus, the other main cable company in Ireland, and a group fronted by John Riordan, a Tralee-born cable industry veteran. A third consortium, led by Setanta and backed by Veronis Suhler, AIG and GMT Communications Partners, a British private equity firm, re-emerged as a contender on Friday.
The potential for the winner is obvious: 348,000 subscribers in Dublin, Galway and Waterford who can be enticed into added-value internet and voice services as they become available, a steady revenue stream enhanced by a conversion of customers to digital services and potential back-office synergies depending on which group wins the battle.
Analysts expect the bidders to use a multiple of seven times earnings before interest, taxes, depreciation and amortisation (EBITDA) as a basis for valuing the company. The final price for the company is likely to reflect the cost of upgrading the network to achieve the triple-play acknowledged as essential by both bidders.
If UGC wins there is the prospect of the sale being blocked by the Competition Authority. Not only would John Malone, who runs Liberty Media, owner of UGC, control both the country’s cable companies — he also has a significant shareholding in News Corporation, which owns 35.3% of Sky and is the parent company of The Sunday Times.
Chorus, with about 200,000 customers, generated revenue of €36.7m in the seven months to the end of 2004, having been rescued from examinership. The company reported a pre-tax loss of €40.3m.
The carve-up of the cable franchise on geographical lines may have ensured market dominance for both NTL and Chorus in the areas in which they operate but it has failed to curb what many consider to be the real competition to both companies: Sky.
Since its launch in Ireland in 1998, Sky has increased its customer base from 500 to 347,000, all of them digital.
As Sky has continued to build share, the cable operators have been reeling from crisis to crisis, suffering collateral damage from a post-dotcom telecom industry meltdown.
Cablecom’s Anderson was employing 75 people in 2002 but currently has a workforce of only 15, a sign, he says, that NTL has been dithering on network improvements despite spending €16m on infrastructure improvements in 2004.
“It would be good for the cable TV industry if UGC won because then you would have a single company that could share resources and go national. If someone else is allowed to buy it this will only delay the process still further.”
Regardless of the outcome of the bidding war, it is likely to be only the first part of a consolidation that will ultimately pitch a single new cable entity against the satellite operator.
“I wouldn’t be at all surprised if there was only a single cable operator in the country in six months’ time,” said Ian McDonald, a senior consultant at Mason Communications, a specialist consultancy. “Ultimately, the winning bidder will be coming up against Sky — it will be cable versus satellite.”
In this scenario, the main edge for cable will be single billing for the three services, something that could force Sky into an alliance with a telecom company to counter such a move.
Given the high level of penetration enjoyed by cable television, internet broadband is still relatively underdeveloped. There are around 1.6m phone lines in the country but only 130,000 broadband connections.
Eircom still enjoys a 77% market share but other than rival telecom operators like Smart, UTV and Esat BT, only NTL and Chorus are considered to have the potential to pose a serious offering for broadband customers.
Combined, NTL and Chorus have a presence in about 550,000 homes across Ireland and neither is dependent on Eircom, something that has tied up other operators in legal proceedings as they tried to force access to the former state-owned company’s network.
The pace of development will differ depending which consortium eventually gets its hands on the prize. But, without very deep pockets and clarity of vision, the winning bidder will find it difficult to make profit out of potential alone.
