MERGER talks between NTL and Telewest, the cable groups, have reached a critical stage, with wrangles over pricing and tax issues potentially threatening to wreck any deal.

Sources close to the merger said yesterday that tomorrow had been set as the “crunch day” for negotiations on the £6.5 billion tie-up, which would create a dominant British cable company and a powerful competitor to the satellite broadcaster BSkyB. BSkyB is 36.8 per cent owned by News Corporation, parent company of The Times.

It is understood that if progress is not made by tomorrow on pricing, management and complicated tax concerns, the talks could be called off.

After discussions started in June, analysts, who have long emphasised the wisdom of a tie-up between Britain’s two biggest cable companies, had expected the deal to go through smoothly. They hoped for a merger announcement this month.

Simon Duffy, chief executive of NTL, recently reaffirmed the benefits of scaling up to fight competitors such as BSkyB. NTL on its own, he said, was not big enough to compete against such “800lb gorillas”.

Yet talks between the two companies, both listed on the Nasdaq stock exchange in New York, have progressed painfully slowly, failing to bring consensus over several issues.

Though little detail of the tax problem is known, it is understood that both sides are seeking to win a better deal.

Another sticking point is Flextech, the television content business owned by Telewest. Although Telewest has put the business up for sale, many industry experts believe that it is simply trying to attract offers to show NTL the value of the division on the market.

Telewest is believed to want to encourage NTL to put a higher price on it than is offered by any other potential buyers. American media groups such as Viacom, Walt Disney and Time Warner are believed to be considering bids for the unit.

It is not clear what managerial concerns remain. Although Telewest had been holding out for greater managerial control in the merged business, it was believed that the group had shelved its demands, allowing Jim Mooney and Simon Duffy of NTL to continue as chairman and chief executive.

Even if these issues are resolved, an announcement would not now be expected until next month at the earliest.

One source close to the deal said: “Because of the sensitivities the people involved have to move very judiciously and carefully. This week is the crucial week and there is a chance it might not happen. However, the market is still keen to see consolidation.”

NTL is bigger, with £2.1 billion of revenues last year compared with Telewest's £1.3 billion. Combining the two would generate savings because NTL and Telewest operate different franchises and do not overlap geographically.

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