The vultures are circling the European cable industry

Citation

Curwen, P. (2002), "The vultures are circling the European cable industry", info, Vol. 4 No. 4. https://doi.org/10.1108/info.2002.27204dab.002

The vultures are circling the European cable industry

A regular column on the information industries

The vultures are circling the European cable industry

Peter Curwen

With European incumbents resisting the opening up of their local loops to other telcos, there appeared to be a golden opportunity for cable operators to move in. The investment duly took place but, with indebtedness at an unsupportable level, a restructuring of the cable industry is now essential and the vulture funds are circling.

The provision of telephony and Internet access via cable, which was often left primarily in the hands of incumbent telcos as in Germany, remains highly variable among the member states of the European Union. One fundamental issue in the project to liberalise the telecoms sector has long been whether attempts to compete with incumbent telcos in providing services via cable over the local loop would prove to be successful. An examination of the recent experiences of United Pan-Europe Communications (UPC), NTL and Telewest, around all of which the vulture funds are circling, suggests that something has gone seriously wrong.

The position of NTL and Telewest in the UK is of particular interest because telephony via cable was permitted there from an early stage and the multitude of regional (monopoly) licences was clearly a nonsensical structure which subsequently triggered a wave of consolidation supported by the financial markets. NTL Inc. emerged from the USA to buy its initial UK assets in 1993, followed by major acquisitions in the UK, France and Ireland during 1998-1999. However, its most significant move was to acquire C&W Consumer Co as well as assets in Germany (eKabel), Sweden (B2) and Switzerland (Cablecom) – not to mention stakes in various football clubs – in 2000. By early 2002, after adding on the likes of 27 per cent of Noos in France, it had run up $17 billion of debt, costing $1.5 billion a year in interest charges which it could not meet. Although NTL duly filed for Chapter 11 bankruptcy protection, CEO Barclay Knapp continued to argue that the business was fundamentally sound and that the strategy of international expansion was not at fault but rather the fact that acquisitions had been paid for in cash rather than NTL stock.

In May 2002, bondholders, owed $10.6 billion and now including so-called vulture funds – distressed debt specialists that buy bonds trading well below par value in the hope that a financial restructuring will cause their value to rise – agreed to swap this for 100 per cent of the equity in New NTL – the UK and Irish business into which they would inject $500 million of short-term financing – and 86.5 per cent of NTL Euroco containing the remaining European assets. for their part, existing shareholders will receive a package of rights and warrants that will probably turn out to be largely worthless.

The situation at Telewest is less severe even though its share price has fallen by 92 per cent over the past year. Although it has debts of $7.7 billion, it has sufficient cash on hand to permit it the luxury of awaiting developments elsewhere before committing itself to, say, a merger with a restructured NTL. Furthermore, it could potentially sell its content division, Flextech, although there are as yet no potential buyers. However, its business plan is not fully funded, it has to meet tough covenants attached to its loans and it is under pressure to negotiate a debt-for-equity swap on the grounds that it is pointless to pay interest charges on debts that are going to have to be swapped sooner or later. Microsoft, owner of a 23.6 per cent stake, has largely written down its stake and is prepared to sell it off. Meanwhile, Liberty media remains the largest shareholder and intends to have a major say in any restructuring. For the time being, the vulture funds have chosen not to move in on Telewest.

Cable penetration in The Netherlands is extremely high. UPC, in which UnitedGlobalCom of the USA had a majority stake at the time, took full control of UTH in 1998 and part-floated in early 1999. It subsequently built up extensive networks, albeit largely outside the UK, Germany and France. By early 2002 UPC had debts of $10 billion and less than $1 billion of cash. Its share price, which peaked at $70 in early 2000, had fallen to $0.1 despite the fact that it had eight million subscribers. UPC accordingly proposed to swap nearly $6 billion of debt for equity. Because it had a loan note worth $870 million at a UPC subsidiary, Belmarken, Liberty Media was in a position to play a major role in any restructuring.

One way or another those who bought equity stakes in European cable operators – and that includes the likes of France Télécom with its 18.3 per cent stake in NTL although it is to be handed back Noos – will see their investments largely wiped out. Even Deutsche Telekom, foiled by the German cartel office in its attempt to sell its main cable subsidiaries to Liberty Media, must now expect to be offered only half last year's price. Microsoft has sold its stakes in NTL and UPC and is likely to do so at Telewest. Hence it is Liberty Media, despite its rebuff in Germany and its failed attempt to take a major stake in a restructured NTL, which is likely to emerge as the major player in European cable, although its relationship with other bodies, including the vulture funds that will temporarily hold major stakes by swapping bonds bought at distressed prices, has yet to be clarified. It made its first move in mid-May by tabling an offer to buy Cablecom which owes roughly $2 billion to Swiss banks. Since it is also the majority shareholder in UPC's parent, UnitedGlobalcom, which also happens to be the biggest holder of UPC bonds, it is expected to seek to retain control at a restructured UPC, although other creditors are likely to use that expectation to their advantage.

The overall picture is gradually becoming clearer. By its very nature, the cable industry had to invest hugely to lay its networks before revenues came on stream. Unfortunately, the melt-down in the broader TMT sector happened at precisely the time when cable operators' finances were most stretched, and their creditors duly decided to cut their losses – which in practice has meant taking temporary ownership of extensive cable assets throughout Europe. Given that cable subscriptions are reasonably buoyant in many countries, and that broadband Internet access is beginning to take off in a major way, the cable operators that emerge from their restructurings with their debts largely under control should now survive fairly comfortably, although telco incumbents are certain to give them as rough a ride as possible by driving down their own Internet access charges. However, who will end up as ultimate owners of these cable assets as yet remains unclear, as is the extent to which further consolidation will need to take place.

It is finally worthy of note that in the USA cable operators have long engaged in a strategy of swapping subscribers in order to build up economic clusters of adjacent systems, and have not had to worry overmuch about the threat from satellite TV. Furthermore, there is only one major and one subsidiary language to cater for. There is accordingly little likelihood that contagion will spread from Europe.