Insight Analysis: Rough Ride Continues For ITV

The anticipated passing of the Communications Bill was not included in the Queen’s speech, effectively dropping the much-sought changes in media ownership rules down the Government’s priority list. Charles Allen, Granada’s chairman, subsequently wrote to the prime minister saying that if Granada is prevented from consolidating for much longer it could be taken over by a European ‘predator’ and ONdigital, its digital terrestrial service, closed down completely. Desperate times, it seems.

One of the main problems is that Carlton and Granada’s share prices have been depressed in recent months due in part to the advertising downturn and also because of the costs of running ONdigital. The market’s recent preoccupation with loss making companies has put ONdigital – and therefore its two owners – under the investors’ spotlight and caused shares to steadily drop. Allen’s letter to the PM reportedly says that Granada’s shareholders will not be prepared to pump money into ONdigital and put up with a falling share price for much longer.

Granada and Carlton are keen to see a merger as the cost savings it would bring are effectively already factored into their current share prices. If it is substantially delayed this premium may be removed and stock could fall even further still, making the companies even more attractive to potential buyers. However, Gerry Murphy, chief executive of Carlton, reportedly responded to Allen’s leaked letter saying it was ‘hysterical scaremongering’ and that a merger between the two companies is not inevitable or necessary.

Meanwhile, a number of broker and agency forecasts are showing ITV revenues down 9-10% for the year, the poorest conditions in the last decade. Granada has said that revenues were down 11% in the nine months to June. Buyers’ forecasts suggest that ITV’s revenue growth could remain negative even into next year; previously an upturn was expected in the latter part of 2001. Some advertisers have turned away from ITV this year seeking cheaper media after the Network’s airtime costs hit a premium in 2000.

The big worry for the ITV companies and their investors is that the advertising downturn may not only be cyclical – that is, part of a universal trend – but rather structural and that ITV as an offering to advertisers is losing out to more attractive media. According to long-term projections by ABN, ITV’s ad revenue growth will not reach the levels achieved in 2000 at any point between now and 2010.