Telewest TWSTY
January 16, 2003 - 7:33pm EST by
2003 2004
Price: 8.99 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 88 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Telwest is in the process of finalizing its exit from bankrupcty and the equity market cap is roughly 4x the value it is likely to receive and this spread can be captured by purchasing bonds.

The trade is to be long Telwest bonds and short Telewest equity.

Telewest is a UK cable operator that is in the process of reorging its balance sheet. The creditors are in the process of dividing up the company, so nothing is final until the negotiations are finished, but the following seems to be the plan

1) The bank debt will remain (3 banks are dissenting over monies due on fx contracts)

2) The high yield will be equitized and get 97% of the equity

3) The equity will get the remaining 3%

As a result of the 97-3 split there is a necessary relationship between the value of the bonds and the equity, or at least there should be...

Security Amount Price Value at market
Bonds $4.8 Bil. 18c $864 million
Equity (ADRs) 14.4 Mil 8.99 $130 million

Notice that the relationship in market values does not reflect the 97-3 ratio. Takeing the bond price of 18c and applying the 97-3 ratio implies a $1.85 stock price...

Since the plan has yet to be finalized, there is risk that the relationship changes. I think this is small, given that the equity holders are being thrown a bone already, so it's not likely to move in a direction that is averse to the trade.

The real risk I see involved being about to borrow the stock and hold it thought the several months until the reorg is complete.


Capital restructuring will close gap.
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