DBRS Confirms NTL Investment Holdings Ltd. and NTL Cable PLC

Dominion Bond Rating Service (“DBRS”) has today confirmed the ratings of NTL Investment Holdings Ltd. and NTL Cable PLC (collectively, “NTL”) with Stable trends, following the closing of NTL’s acquisition of Telewest Communications Networks Limited (“Telewest”). This resolves the “Under Review with Developing Implications” where the ratings were placed in October 2005.

NTL acquired Telewest for £3.5 billion in cash/equity (£2.26 cash/£1.2 equity) representing a six times EBITDA multiple or roughly £850 per revenue generating unit (RGU), which DBRS believes is fair. The acquisition increased debt on a pro forma basis by £1.8 billion, hence weakening the balance sheet, which was somewhat mitigated by the equity component and significant cash on hand that was used in the transaction (£0.66 billion). Nonetheless, the increased leverage offsets considerable balance sheet improvements NTL made in 2004 and 2005. Cost synergies, through overhead reduction and consolidation of assets, are expected to be meaningful in the next 24 months, which should contribute to improvements in margins and cash flow from operations that are expected to reduce debt levels and improve the balance sheet in the medium term.

The ratings are confirmed for two principal reasons. Firstly, the improved size and scale as a result of the merger will position NTL to compete more effectively against its larger rivals, British Sky Broadcasting Group plc (“BSkyB”) for pay TV service and BT Group plc (“BT”) for broadband and telephony. Secondly, although the credit profile has weakened, DBRS notes that it has been mitigated by the equity and cash component, as well as meaningful operational improvements from NTL and Telewest in 2004 and 2005.

However, DBRS notes the ratings are limited by low penetration rates that are structural in nature in the United Kingdom. Pay TV penetration is low because many consumers are content receiving free off-the air service, NTL (pro forma) only passes about half U.K. homes, and BSkyB dominates pay TV (able to offer to most U.K. homes), leading with exclusive content and strong brands. In addition, ratings are limited, due to NTL’s exposure to legacy telephony service and business service, both of which are eroding due to usage declines, mobile substitution, and price erosion. NTL does not have a mobile offering to offset some of the legacy declines. Lastly, NTL faces integration risk in merging two large companies, including customer-sensitive areas, such as billing, service plans, and service. Notwithstanding, NTL continues to be the only operator to offer a ”triple play” bundle of services (video, telephony, and broadband), which drives average revenue per user (ARPU), improves EBITDA margins, and reduces customer churn.

In addition to the merger with Telewest, NTL is in talks to potentially acquire Virgin Mobile plc’s 5.8 million U.K. wireless subscribers (using T-Mobile’s network). Given the equity component, the ability to offer the ”quadruple play”, and the strong brand (potentially to be expanded to other services), DBRS considers this transaction as credit neutral. However, DBRS notes the transaction would increase risk by adding another integration element.

Post-merger, the focus in 2006 will be integration, rebranding, and execution on cross-selling and bundling. However, a new re-energized national cable company, focused on execution and bundling consumers, will be better positioned to compete with BSkyB and BT in the long run, which would have positive ratings implications. However, DBRS notes that the ratings could come under pressure if integration does not proceed as expected, including realization of cost synergies.

Notes:
This rating is based on public information.
Issuer ratings apply to all general senior unsecured obligations of the issuer in question.