Debt stretches cable firms to breaking point

Telewest and NTL are seeing growth stall and equity fall amid crippling interest payments

After a decade of network construction and a flurry of mergers, the UK cable sector, now divided between NTL and Telewest Communications, seems no closer to financial viability or operational success.

NTL, in particular, faces tough questions about how it will surmount a cumulative debt load of $22bn (£16bn). As low-interest debt funding for telecom firms has dried up, heavy borrowers such as British Telecom, Telewest and NTL have seen the value of their equity evaporate.

Commenting on NTL, Michael Nathanson, an analyst with Sanford C Bernstein in New York, said: "In this equation, the debts overwhelm the equity. I wouldn't write NTL management off, but the high yield and convertible market have collapsed."

Those are chilling words for Barclay Knapp, the 43-year-old American chief executive and co-founder of NTL. After making an estimated $200m from selling a US mobile company, he parlayed a few scattered UK cable franchises into pole position in the industry with the £10bn acquisition in 1999 of the residential cable networks of Cable & Wireless. Mr Knapp's fearless use of debt and formidable deal-making skills saw NTL outspend and out-manoeuvre the company's larger, mainly North American, rivals.

However, less than two years after seemingly clinching victory with the C&W deal, the accumulated haemorrhage of financial value is mind boggling. France Telecom, for example, has seen the value of a $5bn investment in NTL, used primarily to fund the C&W purchase, shrink to less than $500m.

Although the rise of the internet in the late 1990s delivered a welcome third business to sit alongside telephony and cable television services, the cable groups have failed to turn their strategic advantage into a popular consumer product. In the past year, as BSkyB's installation of direct-to-satellite customers roared past 5 million, cable subscription growth stalled, while total debt continued to rise.

As the biggest inward investor in Britain during the 1990s, cable's mainly North American backers spent more than £12bn. But most of that was borrowed and the industry's interest payments on its UK assets will exceed £1.2bn in 2001 – more than £3m a day. Worse still is that neither NTL nor Telewest have finished borrowing.

Nigel Hawkins, an analyst with the stockbroking firm Williams de Broe, said: "The finances are very, very weak. If you look at equity versus debt you end up with some tremendously high ratios. Both NTL and Telewest need more equity."

Such are the near-term worries swirling around the cable companies that most news is interpreted as bad news. Thus when repayment of a $1.85bn portion of NTL's debt to France Telecom was recently put back to 2009 from 2002, some investors, rather than express relief about the rescheduling of a loan obligation, were concerned about future dilution and the French telecoms giant gaining control over the company.

Commenting on the spiralling nervousness of investors, an advisor to NTL said: "It's the nervousness of the markets when the telecoms sector is weak and the company is on its knees. Where's the bottom? Some suggest it is lower and it may well be." That would heap more misery on NTL's suffering shareholders. After surging past $110 per share in early 2000, which valued NTL stock at over $30bn, the subsequent market reversal has reduced the value of the company's equity to just $1.7bn. The share price yesterday declined a further $2.09 to $5.95 – a five-year low.

Telewest, the second largest UK cable group, has faired only slightly better. Its shares peaked last year at 563p, but closed down 7.25p yesterday at 75p. That values its equity at £2.1bn against total borrowings approaching £5bn.

In a recent research note, analysts with Schroder Salomon Smith Barney sparked a new round of cable stock selling when they observed: "NTL [has] advanced [its] funding in recent weeks, but [is] still not fully funded. Given the current equity climate, and the limited scope for selling non-core assets, we highlight funding as still the major risk. We believe [NTL is] funded for at least the next 18-24 months, but funding concerns will continue to weigh on the [stock], and the company faces potential cash calls not included in [its] published funding requirements."

Telewest has funding in place with a debt ceiling of nearly £6bn, which is deemed sufficient to see it through to profitability around 2004. What's more, Microsoft and Liberty Media, each owners of a 26 per cent stake, have deep pockets should cash be required.

According to one argument, the equity of NTL and Telewest may have no value at all. SSSB notes: "Given the general collapse in TMT equity valuations and high levels of debt, the cable companies now look very expensive on enterprise value-based multiples. Even if the equity values fell to zero, cable enterprise values would still be challenging in today's market."