Carlton And Granada See Shares Rise As City Backs Merger
Carlton and Granada saw stocks rise today as the city welcomed news that the ITV partners could go ahead with their planned £4 billion merger without divesting their sales houses.
Lorna Tilbian, analyst at Numis Securities, said: “The merger is the best possible outcome and allows ITV to better compete with a strong BBC and BSkyB.”
The majority of analysts had believed that the merger would not go ahead without Carlton and Granada being forced to sell off at least one of their sales houses on competition concerns, a move many believed would wipe out many of the main benefits of the merger.
Trade and Industry Secretary, Patricia Hewitt, approved the deal earlier today without any structural barriers. However, the Competition Commission will impose a contract rights renewal remedy, which will give media planners and advertisers the right to renegotiate the terms of their current contracts without change for at least three years.
This remedy may present an impediment to ITV’s growth in the future and Sarah Simon, analyst at Morgan Stanley, commented: “The conditions of the merger are significantly better than we and many others expected. The issue going forward is how draconian the contract rights renewal remedy will be. Currently the proposals will cap their share of advertising for the next three years, which gives ITV a limited power ratio.”
She continued: “There is also the possibility that ITV’s audience share would drop, incurring penalties, but we feel this as unlikely going forward. We are negative on Carlton and Granada and see limited revenue growth going forward.”
Now that the will-they wont-they merger saga has reached a conclusion the logistics of a possible foreign take-over of ITV is likely to come to the fore once more. Not least from former head of Channel Five, and media wildcard, David Elstein, who has been linked to a variety of proposals to oust the current management (see Elstein’s ITV Bid Boosted By Hallmark Link).
Simon claims it is unlikely that the merger will herald a flurry of take-over movement. She said “Current valuations for both Carlton and Granada are both too high to make a foreign take-over viable. As long as the valuations remain at this level the risk of a take-over is minimal. In the long term if valuations came down a take-over would be more likely, but still quite slim.”
However, it is hoped the merger will pave the way for a less dysfunctional structure at ITV, which Carlton’s chairman, Michael Green, describes as a “1950s federal system”.
James Ibbotson, analyst at Societe Generale, commented: “On the one hand the cost savings created by the synergy has boosted the group’s share prices making valuations too high for a viable take-over post-merger. However, in the long-term the merged group, with its streamlined structure may well make the group more attractive to foreign investors.”
Tilbian also believes the merger could pave the way for foreign investment, but points out: “Investors are busy at home with their own regulatory and investment issues.”
It remains to be seen how the remedies will be imposed and how swiftly the logistics of the merger can be ironed out. However, the majority of analysts would agree that a single ITV is the only way to provide a counterweight to the BBC and address the channel’s diminishing power ratio in the multi-channel marketplace.
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