NLI - classic case of "Of course we are fully funded and can manage our debt":
Credibility Troubles Make NTL
A Prime Target for the Bears
By JESSE EISINGER
Staff Reporter of THE WALL STREET JOURNAL
(July 6)
Heard in Europe has made the bullish case for NTL several times -- and each time, sad to say, we were wrong about the stock. So it behooves us at least to acknowledge the potent bear arguments against the United Kingdom-based cable TV company.
First there is the credibility question. Investors used to have warm and fuzzy feelings for CEO Barclay Knapp and CFO John Gregg, considering them solid operators and savvy financial managers. But this year, as the stock dropped and NTL faced a funding gap, many investors felt misled about its cash needs. Earlier this year, NTL and the analysts who liked the company spread the word that it would meet or exceed its previous earnings guidance for the first and second quarters and the year.
This reassuring noise pushed the stock up. So far, the earnings guidance looks sound. The "whisper" number for the company's second-quarter earnings before interest, tax, depreciation and amortization, or ebitda, is between $110 million and $120 million (between 131.5 million and 143.4 million), above market expectations of $90 million to $95 million. Mr. Gregg says he can't confirm the number but that he is "not uncomfortable" with that. The second-quarter figures are due to come out in the first week in August.
After spreading the positive news about earnings, the company hit the market with a larger-than-expected convertible-bond offering, which has a dilutive effect for equity holders. They feel burned. Mr. Gregg denies that the company misled investors: "We didn't ramp the stock at all." He says the company issued the reassuring words on earnings because it felt the need to respond to speculation, including takeover rumors. He adds that some of the "biggest companies in the world," including AOL Time Warner, are "clearly interested in working with us."
The bears argue that it is not clear that the company's assets can generate adequate cash flow to support its net debt of more than $15 billion.
One New York-based junk bond fund manager who is bearish on NTL's high-yield bonds argues that the company needs to raise margins on ebitda to 40% from year 2000 levels of 11% and double its average revenue per user, or ARPU, merely to cover its fixed costs, including maintenance capital expenditure and interest expense. That's a stretch because raising ARPU from NTL's already high levels will be challenging. Based on some investors' sum-of-the-parts value estimates, the company's assets are worth only 50% to 70% of its debt.
In other words, an ugly situation.
The bulls argue that the company has value that goes unacknowledged by pessimists in its local phone business in Britain, which generates about $800 million in annual revenue, and the broadcasting towers business. NTL hopes to issue a tracking stock for the towers business, or barring that perhaps spin off or sell it. That business is expected to generate about $320 million in revenue this year. (The skeptics point out that valuations have dropped significantly for towers businesses.) If you take those businesses into account, the junk bonds are covered by assets at 100%, posit the optimists.
NTL argues that its product offering is strong and that it is moving to cut costs and raise prices to improve its financial situation. Mr. Gregg says that ebitda margins are rising, and that NTL isn't in danger of more serious financial difficulties. |
