'Broadbandcast' News: Telewest to Play Chello Card for Internet Access - TheStreet

LONDON -- There's no doubting that

Telewest Communications

(TWSTY)

, the U.K.'s second-largest cable company, has some powerful shareholders.

After a deal between one of the shareholders,

Liberty Media

(LMG)

, and

UnitedGlobalCom

(UCOMA)

, Telewest now has some powerful partners.

The deal announced Monday between Denver-based UnitedGlobalCom and Englewood, Colo.-based Liberty Media is a complex but crucial one for Telewest's future. UnitedGlobalCom will acquire 25% of Telewest as part of a cash-and-stock deal that transfers various assets of Liberty -- including the Telewest stake -- to UnitedGlobalCom, making Liberty its largest shareholder.

The Telewest holding, worth around $3.2 billion, was immediately sold to UnitedGlobalCom's Dutch-based cable subsidiary,

United Pan-Europe Communications

(UPCOY)

.

In New York trading on Tuesday, Telewest shares fell 3 1/8, or 7.1%, to 41, while Liberty slipped 1/16, or 0.3%, to 24 1/3. UPC dropped 9/16, or 1.1%, to 50.

Is Telewest merely swapping one large shareholder for another? Not exactly.

"We look forward to working with Telewest management to explore broader strategic relationships between our two companies," Mark Schneider, the chairman and CEO of UPC, said in a statement.

Although Telewest did not return

TSC's

phone calls inquiring as to the nature of those strategic relationships, analysts are in no doubt that they center on

Chello Broadband

, UPC's Internet services provider.

"The prime suspect here has to be Chello, and leveraging that company into the U.K.," says Christian Maher, an analyst at

Investec Henderson Crosthwaite

, who has a buy rating on Telewest. Investec has no investment banking relationship with any of the companies involved.

Telewest is following a different, and as yet unproven, strategy in the U.K. compared with its other cable providers. Over the past four years, the country's cable companies have consolidated, culminating in the merger last year of

Cable & Wireless Communications

and

NTL

(NTLI)

, in an effort to sell as many services -- telephony, Internet and television -- to as many households as possible.

There were expectations that Telewest itself would be swallowed up by that combination, but instead Telewest merged with

Flextech

, a pay-TV and interactive services provider.

A Broadband Broadcaster

Through this merger, Telewest hopes to provide 1.6 million households that subscribe to its services with Flextech's proprietary content. This includes four TV channels like

Bravo

, as well as joint ventures with the

BBC

. In doing so, it will further its ambition to become what Adam Singer, Telewest's charismatic head, rather cumbersomely refers to as a "broadbandcaster." With Chello onboard, Telewest could offer its customers broadband Internet services, too.

Of course this works both ways. For Chello to be successful, it must be able to sell its products and services not only over UPC's network but also over the networks of third parties such as Telewest. This deal will help Chello as well in its planned

IPO, which was put on hold last month presumably because UPC was in the midst of negotiations with Telewest.

UPC's shareholding will help Telewest in one other crucial aspect.

A major flaw in Singer's strategy is that many believe Telewest is too small to remain independent. However, with UPC's stake in the company, together with the 30% that

Microsoft

(MSFT) - Get Report

is trying to buy, Telewest now has the kind of backers that would allow it to move forward with its strategy without any unwarranted advances. The

European Commission

's competition body is investigating the Microsoft deal, and a final decision is expected Aug. 4.

"I think now, as part of a bigger consortium like this, Telewest can remain independent," says Berrie Verwey, an analyst with Dutch bank

Vanlanshot

. Verwey does not rate Telewest but has an outperform rating on UPC. Vanlanshot has no investment banking relationship with either company.

However, as many have discovered, with friends like Microsoft, who needs enemies?