ntl approach to ITV over potential merger

ntl yesterday shocked the television industry and the City when it revealed that it had made an approach to ITV with a proposal for a possible merger or takeover bid rumoured to around ?5 billion. The news comes only a few months after ntl completed its acquisition of publicly-listed Virgin Mobile to become the UK's first true quad-play company offering its residential customers: telephony, broadband, video and mobile.

Virgin Mobile was a MVNO, mobile virtual network operator since it didn't have a network of its own but instead leased capacity from T-Mobile and used them to handle customer billing even including the printing of Virgin Mobile's monthly statements. Under the terms of the deal, ntl acquired the right to re-brand its UK operations under the Virgin brand umbrella.

Most of the week the City pages have been reporting ITV's ongoing struggle to replace Charles Allen as its Chief Executive. Allen has presided over ITV at a time when it has faced increasing audience fragmentation particularly in satellite homes, losing more audience share to BSkyB than the other terrestrial broadcasters. Institutional investors have lost confidence in ITV's ability to maintain audience share at a time when its ITV1 channel has increasingly relied on a small number of programmes and formats. Recent new episodes of some of ITV's strongest dramas failed to halt audience declines at the start of the Autumn schedule. Allen himself became CEO of the newly created ITV created from the merger of Carlton and Granada when Michael Green was similarly forced to resign by city investors, most notably Anthony Bolton a fund manager at Fidelity.

The news of the talks came on the same day that ntl reported that in the previous quarter it had churned 36,000 customers. In some respects its not surprising that ntl, like the other broadband market leaders BT and AOL are losing customers to new entrants. But more importantly, ntl is having to rollout aggressive pricing for its bundled package that ill erode its ARPU that is among the highest in the industry.

At first glance there doesn't appear to be too many cost synergies between ntl and ITV. ntl for example produces little original programming of its own.

In ntl cable homes, ntl would be able to promote the ITV channels on the electronic programming guide much in the same way that BSkyB does on its proprietary set-top box, that might help to halt the fall in audience share in cable homes. The two companies combined would also present a greater challenge to BSkyB's dominant purchasing position for the rights to certain sports and feature films. For ITV, yesterday's announcement will not help in their search for a new CEO with most of the industry heavy hitters including Stephen Carter, formerly managing director of ntl, having been ruled out already. The story will also be of interest to any private capital consortium considering making an offer for ITV.

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