Microsoft To Benefit hy Bondholders

Microsoft Corp. will pay close to $3 billion in stock to take a 29.7% stake in British cable operator and high yield issuer Telewest Communications plc, a deal that should benefit junk investors in two ways, analysts said.

"First, it's significant to investors to have a strong, well-capitalized owner of 30% of the company which you're lending to," according to one media analyst. "And, because Microsoft has taken a stake in other primary European cable companies, it's a leading indicator of further consolidation in the industry and economies of scale being created."

The move also marks a potential change in direction for Microsoft in its European cable strategy, according to sell-side sources.

While the software giant has invested heavily in both domestic and foreign telecom and cable providers to ensure the deployment of its own software and operating systems, so far it has remained a passive owner of all its affiliates. Whether or not Microsoft will move to become an active shareholder will come to a head within the next six months, said one analyst, "and that could potentially be a very big deal."

"With regards to the United Kingdom and Europe, Microsoft has been able to utilize its large cash balance and liquidity to take small or mid-sized passive stakes in all of the major cable operators," a high yield analyst said. "Still, they're not solely a cable supporter. They've also taken stakes in DSL systems - any way to further deploy their own operating systems."

Under the terms of the Telewest deal, completed in May but disclosed in a federal filing last week, Microsoft will buy the shares currently owned by MediaOne Group. While AT&T is looking to acquire MediaOne for $58 billion in cash and stock, in order to do so and remain in compliance with both federal and European antitrust laws, AT&T must divest itself of large chunks of its assets.

Pending approval from Telewest's shareholders, Microsoft will have successfully gained entrance into each of England's three major cable operators.

In January, Microsoft announced a $500 million investment in NTL, one of the U.K.'s leading broadband operators, with 1.4 million telephone, cable and Internet customers. The money was earmarked to deliver broadband services, including high-speed voice and video data over NTL's fiber optic network in the U.K. and Ireland.

That same month, Microsoft announced a similar deal with United Pan-Europe Communications, another British-based telecom issuer.

In May, Microsoft invested an additional $5 billion in AT&T under an agreement in which AT&T would increase its use of Microsoft's TV software platform in set-top devices and the two would work together to showcase digital cable services in two major markets.