Fool's Eye View

[ November 29, 2000 ]

Comment: Granada

By Christopher Spink

Great Titchfield Street, London -- Granada Media (LSE: GME) has endured a turbulent few months on the market since being spun off as a separate entity in July. Initially investors applauded Granada chairman Gerry Robinson's deal, swiftly snapping up the 20% of shares sold at 515p. This raised £1.3b after costs, enabling the group to take control of the consolidation of ITV. Granada consequently used the cash to buy United News & Media's (LSE: UNWS) ITV franchises for £1.75b.

Today's final results for the year to the end of September do not include figures from the Meridian, Anglia and HTV regions picked up from United. Pre-tax profit from the older media businesses rose just 1.7% to £301m on turnover up 16.8% to £1.17b. A more relevant figure, stripping out exceptional items and investment in the OnDigital joint venture with Carlton (LSE: CCM), shows that earnings before interest, tax, depreciation and amortisation improved 11% to £279m on sales up 9% to £1.09b.

Exceptional results?

These results produced earnings per share of 13.8p, putting the group on a price to earnings ratio (P/E) of 27. This is largely irrelevant though. First of all it does not include the United ITV franchises. In the first half of the year, these produced a £52.6m profit on £295.5m turnover. If this interim result is annualised then Granada's TV profits and turnover should increase by more than a third. However, Granada also has to pay for acquiring United's ITV interests.

At the time of the deal at the end of July, Granada planned to issue £1.25b of new shares to United and give the company £500m in cash. This would have diluted existing shareholders by about 12% but the cash payment could have been funded out of Granada's post-float inflated balance sheet. Since those heady days though, when Granada's shares hit 676p, the group has lost 44% of its value.

The share price now sits at 377p and United has an agreement to take all the £1.75b in cash if Granada's shares fall below 585p, as they have done. This looks likely to be enforced. If executed then Granada will be forced into debt, but at least existing shareholder will not have their stake diluted. Nevertheless, it makes Granada less flexible. This should be overcome when Granada completes a full demerger of its media operations early next year, when presumably more of the Granada Compass's (LSE: GCP) stake will be sold.

Regulatory round-up

Today's statement from chief executive Charles Allen failed to clear up several other matters currently hanging over Granada. Principal amongst them is the Government White Paper on the communications industry, due to be released in the next fortnight. This will indicate whether the media ownership rules will be relaxed, allowing Granada to take control of the rest of the ITV network.

The other concern is that 2000 was a golden year for advertising revenue on ITV as a whole. The network enjoyed a boost from televising major sporting events, such as the Rugby World Cup and Euro 2000 Football. Granada warned in September that this was exceptional and would not be repeated in the coming year. Today, though, the group forecast a 4.6% rise in ITV advertising revenue for all of 2000 -- December advertising is already 7% up on last year's figures.

Finally, OnDigital continues to make massive losses. In the year to the end of September it produced an operating loss of £176m on turnover of £53m. It seems Granada will have to endure these for some years to come. Good news though is that OnDigital should have 1m subscribers by the end of the year.

Where Next?

• Fool's Eye Views: Gazing up at Granada ; Gripping Granada grabs ITV
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