The Anglo File: Musical Chairs in Cable Industry Leaves TeleWest Standing

With any plans for a merger with Cable & Wireless scrapped, TeleWest, the U.K.'s second-largest cable operator, now finds itself alone.
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There was a lot of movement in the U.K. cable industry on Monday, and just as in any game of musical chairs, one poor soul was left standing when the music stopped.

The U.K.'s third-largest cable operator

NTL

(NTLI)

leapfrogged into the No. 1 spot when, with the financial help of

France Telecom

(FTE)

, it bought up the consumer cable network of its larger rival

Cable & Wireless Communications

for $10 billion. The corporate part of C&W Communications' business will be merged back into the parent company

Cable & Wireless

(CWP)

.

Despite being in talks for about four months with C&W about a possible merger,

TeleWest

(TWSTY)

, the U.K.'s second-largest cable operator, now finds itself very much on its own.

Seats at the Last Supper

For the people who managed to find seats, the future looks brighter. By selling its 53% stake in C&W Communications, C&W took a major step in its aim to transform itself from a mishmash of companies in which it holds majority stakes into a telecom operator focused on the business telecom market.

The next hurdle for C&W is to dispose of its 50% stake in the U.K.'s fourth-largest mobile phone operator,

One2One

. The bidding process for the stake fell apart this month when prospective buyers began dropping out as the price rose over $17 billion.

For France Telecom, the $4.5 billion of extra money it injected into NTL to bring its stake in the U.K. cable company to 25% from 10% means it now has a good point of entry into the U.K.'s highly valued telecom market. And NTL? Well, it has achieved its goal of becoming the largest cable player in the U.K. and the second-largest cable operator in Europe after

Deutsche Telekom

(DT) - Get Report

.

The market initially reacted positively to the news, but the stocks suffered mixed fortunes by the end of day. C&W Communications closed down 1.2% at 690.5 pence, C&W ended down 2.6% at 745.5 pence and France Telecom finished up 4.7% at 69.55 euros. NTL is only traded on the

Nasdaq

, where around midday it was down 2.77% at 96 1/2.

Two's Company, Three's a Crowd

Ominously for TeleWest, the head of NTL, Barclay Knapp, said in a conference call after the deal was announced that NTL had no "present plans" to bring TeleWest into the fold. Rather, NTL is still considering applying for one of the five licenses for the next-generation mobile phones -- known as UMTS, which offer data as well as voice telephony -- that the U.K.'s Department of Trade and Industry is set to auction.

Other than looking to employ its capital elsewhere, an equally compelling reason why NTL may not be thinking of joining up with TeleWest is that, following this deal, it has simply "run out of money," says Steven Adshead, cable analyst at

Datamonitor

, a management consultancy.

In the short term, Adshead believes the two cable companies may embark on a series of network swappings. The consolidation of the cable industry, which has ended up with two major operators from about 10 two years ago, has had the unfortunate result of creating a very disparate geographical spread, with the companies owning franchises dotted all around the country.

Therefore, the swapping of networks, common practice in the U.S., would allow the companies to focus their efforts on a few regions.

The joker in the pack is

Microsoft

(MSFT) - Get Report

, which has a 5% stake in NTL and an almost 30% stake in TeleWest. Press speculation that the U.S. software maker would act as the catalyst for a bringing C&W, TeleWest and NTL together are "wide of the mark," according to

Inside Cable

, an industry newsletter.

"The software giant has never sought to own or control hardware or companies," an editorial in the newsletter says. "It has used its financial and technical muscle to influence decision-making and to ensure that its longer-term goals are recognized and implemented."

Datamonitor's Adshead argues that Microsoft doesn't hugely care whether NTL and TeleWest are one or two companies, since it is merely seeking to exert pressure to gain a uniformity of technology in the industry, preferably its technology.

Certainly TeleWest is looking a lot smaller and not a little vulnerable as of Monday. And, embarrassingly, it has been left standing by its rivals.