The sale of ITV’s two airtime sales houses is the most likely outcome of the Competition Commission’s ‘remedies’ for the merger of Carlton Communications and Granada, according to analysts at Morgan Stanley.
The Commission has already presented a number of possible restrictions which would allay its concerns over a single ITV’s share of the television advertising market. These range from behavioural remedies – essentially a constant monitoring of the way ITV sells its airtime – to an outright ban on the merger (see
Competition Commission Delays Verdict On ITV Merger).
Morgan Stanley believes that a combination of the political pressure to allow Carlton and Granada to merge and the need to remain tight on competition issues is likely to result in a divestment of the two sales houses. Recent press speculation has pointed toward a similar outcome (see ITV Merger In Jeopardy As Remedies Are Rejected).
Is the loss of the sales houses so bad? Carlton and Granada most definitely say ‘yes’. Carlton chairman, Michael Green, has already threatened to call off the merger if the two companies are forced to sell the advertising sales houses (see Carlton Boss Threatens To Halt Planned ITV Merger).
The industry, on the other hand, has reacted in a more sanguine manner to the notion of separate sales operations, notes Morgan Stanley.
“Industry commentators appear unconcerned that, if this structural solution is imposed, it might have negative implications for Carlton and Granada. [By contrast] Carlton has indicated that it does not see how divesting both sales houses does anything else but make ITV more dysfunctional than it is today,” says the broker’s report.
Analysts believe that, given an enforced divestment of the sales house, ITV will likely incur costs following the merger. Payments to an external sales operation, along with a loss of synergy resulting from the decoupling of programming and sales operations, could hurt ITV’s economies of scale.
The broker estimates that costs to ITV could be in the region of £10 million if it has to outsource the sale of airtime. It also believes that overall synergy benefits from the merger are unlikely to exceed the £35 million guidance given by Carlton and Granada (see Carlton/Granada Move Closer To £2.6bn Single ITV Company).
In addition to the costs of spinning off sales operations, ITV is also likely to lose some advertising market share due to increased ‘dysfunctionality’ of the decoupling of programming and sales, says the report. From the Competition Commission’s point of view, which is that a single ITV may have too large a market share, this would effectively kill two birds with one stone: Permit the merger, whilst reducing market share.
The Competition Commission is due to report its recommendations to trade and industry secretary, Patricia Hewitt, on 26 August.
