A financing manoeuvre made NTL deal possible, writes Jamie Smyth, Technology Reporter.

Shane O'Neill was on holiday in Dingle when he was told that UnitedGlobalCom (UGC) was ranked the highest of four bidders for cable firm NTL Ireland.

Goldman Sachs, NTL's corporate advisors for the sale process code-named "Jameson", rang to offer the good news: UGC, the firm which O'Neill left Goldman Sachs to join in the 1990s, had outbid the likes of entrepreneurs Denis O'Brien and John Riordan with an offer worth €325 million.

"I heard on the Thursday we were ranked highest but we were also told we would have to have all the money paid to NTL within five weeks," says O'Neill. "This was the first time we'd learnt of this condition and gave us just two days to find a way to pay up."

The problem for UGC, a pan-European firm controlled by the US cable veteran John Malone, is that its ownership of Chorus would inevitably prompt a regulatory review by the Competition Authority. An initial review would take at least a month but a secondary review could drag on for a further five months, during which time NTL would not be able to get its hands on the cash.

With NTL threatening to pull the plug on the deal because of its haste to conclude a deal, UGC's advisers, Morgan Stanley, provided the answer to the problem for O'Neill by agreeing to "warehouse" the deal for a healthy fee.

Warehousing is a corporate finance technique - used more often in the US - that enables a finance firm to buy an asset on behalf of its client and hold it in trust until it can be sold on to the client. To facilitate the process in the Republic, UGC lent Morgan Stanley - which has no other cable operations in Ireland that would prompt a regulatory review - the cash to buy NTL Ireland. After Morgan Stanley released the cash to NTL, UGC announced that it was buying the asset back from its advisers.

"This mechanism allowed us to meet the deadline set by NTL Ireland," says O'Neill, who insists he has no doubts that UGC's purchase of NTL Ireland from Morgan Stanley will now pass the competition review, which will be initiated shortly.

But, for a few days, the legion of corporate financiers working on the deal and even the Competition Authority seemed unsure the "warehousing" structure initially proposed by UGC would be allowed. Rumours that the authority may view the sale of NTL Ireland to Morgan Stanley and subsequent resale to UGC as a single transaction were heard on all sides of the deal: by lead bidders and defeated bidders.

That is until one Morgan Stanley advisor spotted that Section 16 of the 2002 Competition Act allowed for these types of "warehousing-style" deals. This discovery paved the way for the €325 million deal to go ahead and perhaps justified some of the €4 million in fees that Morgan Stanley will earn from the deal.

"The clause had never been invoked before so no one knew anything about it," one insider to the deal noted this week. "This could all change when mergers are on the table now," he added.

Earlier this week, Morgan Stanley signed and closed both transactions with NTL, and UGC simultaneously announced that it was acquiring NTL Ireland. The choreography was perfect, a necessary precaution to prevent one of the failed bidders from seeking an injunction to halt the deal. In 1999, when the asset was sold by Eircom and RTÉ to NTL, Denis O'Brien launched an injunction to try to prevent the €680 million (more than twice the value of the current agreement) deal going ahead.

The injunction failed but ended up delaying the acquisition for weeks and costing several million euro in the process.

The three failed bidders for NTL Ireland - Denis O'Brien, John Riordan and the broadcasting firm Setanta Sports - show no signs of contesting the deal this time around. However, all three bidders, and their venture capital backers, will be waiting to see if the Competition Authority allows the merger of NTL and Chorus to go ahead.

"We strongly believe the deal is good for competition and will bring better prices for consumers," says O'Neill, who emphasises that Chorus and NTL's cable and wireless television networks do not overlap.

"The merged company will be a stronger vehicle for investment and give us the critical mass to compete with the likes of Sky and Eircom," he says. "We plan to invest more than the €70 million or so that NTL management recommended needed to be spent to upgrade its cable network to provide broadband, VoIP and digital television to subscribers."

Irish consumers have heard all these promises before from the previous owners of NTL and Chorus, yet both firms together have less than 2,000 telephony customers and just 10,000 broadband customers. So is this latest promise any more believable?

O'Neill points to UGC's record in other European countries such as Austria and Holland, where the firm is providing the kind of triple play services that Irish consumers can still only dream of.

This upbeat assessment is not shared by some of the rival bidders for NTL Ireland, some of whom believe that UGC plans to cut costs by merging its Irish operations. There is also bound to be some concern among third party content providers, such as Setanta Communications, who at present have a very lucrative deal with NTL Ireland for the broadcast of its sports channel.

John Malone's media interests, which include control of the Discovery Channel and a stake in News Corp - which controls BSkyB - may prompt scrutiny by the Competition Authority and the Minister for Enterprise, Michéal Martin, who has the final say on media mergers.

UGC's chief executive Mike Fries, who met Martin at Davos this year, will hope that Chorus's long-running legal battle with the Government over closing down television deflector schemes in the 1990s does not leave any hard feelings with the Government.

The multimillion euro legal case was quietly settled last year and relations between the parties have improved considerably. So while O'Neill may have to wait several months before the champagne corks pop, few analysts believe there will be any more twists to the deal. But maybe O'Neill should steer clear of Dingle for a while.