Once in a while, things make so much sense that they almost have to happen.
That could be the case with today's announcement in Britain that NTL (NASDAQ:NTLI) is acquiring rival Telewest Global (NASDAQ:TLWT) in a $9 billion deal, which includes Telewest's net debt of about $3 billion. For those who don't regularly follow the British media industry, rumors of such a deal had been bandied about for literally years.
NTL is Britain's leading cable company, as well as a provider of Internet and broadband service and fixed-line telephony. Telewest is the No. 2 cable company in Britain (about half of NTL's size in terms of subscribers) and also offers phone and Internet services as well as its own content production.
Ordinarily, it might appear strange that a country's top two players would be allowed to merge. In this case, though, it makes sense. First, the two cable networks really don't overlap. Second, it will make them more competitive with British Sky Broadcasting, a.k.a. BSkyB (NYSE:BSY). That company, of which News Corp. (NYSE:NWS) owns about one-third, has more than 14 million subscribers to its satellite pay-TV service, so it could be argued that the newly combined company will be a more effective alternative for customers.
The deal values Telewest at about $24 per share, admittedly not much of a premium to Friday's close. In addition to having their combined company becoming more competitive with BSkyB, as well as with BT in fixed-line telephony, management from Telewest and NTL is expecting some fairly hefty cost savings -- more than $2.5 billion a year, based on management's estimates -- as well as advantages in rolling out new services such as video on demand and voice over Internet protocol.
Although the combined company will still be a bit smaller than BSkyB in terms of revenue, it will be on the higher side of publicly traded foreign television companies. It will, for example, be much larger than Liberty Global (NASDAQ:LBTYA), Central European Media (NASDAQ:CETV), or SBS Broadcasting (NASDAQ:SBTV), though the latter two are in different businesses -- broadcast TV, rather than cable.
Investors should do some careful due diligence before diving into NTL. After all, the company will still be a distant runner-up in terms of pay-TV subscribers and will have a hefty bit of debt to manage. Still, services like pay TV are increasingly becoming just as essential as other utilities to many customers, so I don't doubt the long-term cash flow generation potential.
For more cable hookups:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
