Copyright 2002 The Deal L.L.C.

The Daily Deal…06/18/2002

From LexisNexis

LONDON - It looks like John Malone may have another battle in Britain.

The acquisitive Colorado cable tycoon, who recently failed in his grab for a piece of Britain's largest cable operator, NTL Inc., has now been rebuffed by bondholders at smaller NTL rival Telewest Communications plc.

Last week, Malone offered to buy bonds of debt-strapped Telewest, but on Monday, June 17, bondholders received his offer coolly, saying they have their own restructuring plans. Caught between them is Telewest itself, Britain's No. 2 cable company, which isn't eager to embrace any debt-for-equity swap.

Through his investment vehicle, Englewood, Colo.-based Liberty Media Corp., Malone launched a tender offer for at least 20% of Telewest's total $8 billion debt load.

Malone, who already owns 5 percent of Telewest bonds and 25 percent of the company's equity, is offering bondholders $846 million in cash — a modest premium to the bonds' trading price last week. The offer hinges on Liberty acquiring at least 20 percent of the bonds.

However, a committee representing a majority of Telewest bondholders said Monday it was skeptical about whether Malone's offer would serve the "best interests of bondholders as a whole." The committee said it had already approached the Telewest board with its own debt restructuring plans and would seek meetings with Malone and Telewest within days.

Andrew Wilkinson at law firm Cadwalader Wickersham & Taft represents the committee.

Malone's offer and the bondholders' response "has definitely raised the tempo on a financial restructuring," said Alex DeGroote, media analyst at Credit Agricole Indosuez in London.

Adding to the sense that Telewest could be on the threshold of restructuring talks, Cadwalader said the bondholders would soon appoint a financial adviser.

The cable company admitted for the first time last week that such a restructuring is an option.

Observers have speculated for months about a possible debt-for-equity swap at Telewest, whose market cap has plunged in two years from £20 billion to just above £100 million ($148 million).

Many of Telewest's bondholders are distressed-debt funds that have bought the bonds with a view to eventually becoming shareholders.

Funds of this kind played a crucial role in the restructuring of New York-based NTL, whose assets are largely in Europe.

Nonetheless, Telewest on Monday downplayed the prospect of the company soon following a similar path to NTL.

"We recognize that we've got balance sheet issues and a financial restructuring is a possibility, but it's only one of a number of options, and we're not in a restructuring situation," a company press official said. "We've got time on our side, because we've got liquidity."

The official said that, even in a "worst-case scenario," the company would remain fully funded for 15 months.

The official declined to comment on whether an investment bank would be appointed to handle talks with creditors.

Telewest's usual financial adviser is Schroder Salomon Smith Barney.

Observers see last week's attempt by Malone to muscle in on Telewest as an acknowledgment that value and control at the company no longer reside in its equity but have been transferred to its debt.

Malone's move also mirrors his recent strategy during a restructuring of NTL. Malone tried to buy out NTL's bondholders before the debt-for-equity swap had been completed last month, but his offer for NTL bonds was rejected. Now, it seems Malone is in a similar skirmish at Telewest.

Shareholders are expected to retain a larger stake in a restructured Telewest than was the case at NTL, so if Malone can add 25 percent of the company's bonds to his existing equity, he could end up with enough to call the shots after a debt-for-equity swap. If he fails to gain the bonds he wants, he would likely find his equity diluted after a debt-for-equity swap. At NTL, where control was swapped for $10.5 billion of bonds, shareholders were left with virtually nothing.

Analysts have long predicted an eventual merger of NTL and Telewest, the two largest players in the fragmented U.K. cable market.

Malone's interests in Britain are only part of a portfolio of European cable assets that includes a controlling stake in the Continent's largest operator, Amsterdam-based United Pan Europe Communications NV.

Earlier this year, German regulators prevented Malone from acquiring Deutsche Telekom AG cable units for about $6 billion.