ITV and NTL are discussing a possible merger, but what is the likelihood of success?
Rumours of a possible merger between ITV
(LSE: ITV)
and NTL
(NASDAQ: NTLI)
were confirmed last week when the companies announced they had been in communication. ITV described it as "a highly tentative expression of interest in holding discussions about a possible combination of NTL with ITV"; NTL referred to "interest in exploring a possible combination transaction".
The language is suitably vague, as one would expect, but the suitors are not simply being coy -- there is a significant chance that discussions comes to nothing. Consider the two companies:
ITV
Resulting from the merger of Granada and Carlton, ITV is suffering from declining viewing figures and a consequent drop in advertising revenue. Profit forecasts have recently been revised downwards. The company also has a pension deficit to deal with, and has been without a CEO since Charles Allen was ousted in August. You may also recall ITV Digital, the company's attempt at delivering digital infrastructure, which crashed and burned in 2002.
NTL
The provider of cable infrastructure for TV, internet and land-line telephone, has recently taken over Virgin Mobile, making it a 'quadruple play' company. Where it loses out to rival BskyB is in content, although it did acquire the production company Flextech as part of its merger with Telewest. Flextech in turn owns part of UKTV.
So on the surface there appears to be a reasonable fit. ITV would finally own a means of digital distribution -- remember that analogue TV will be switched off by 2012 -- while NTL would get the rights to more content with which to entice subscribers. But there's a number of ways that this could fall apart:
- ITV's pension deficit needs to be addressed and NTL already has considerable debts;
- competition regulations are also a factor;
- execution risk: NTL already has to contend with integrating Telewest and Virgin Mobile. Adding ITV to the mix complicates the business still further;
- while NTL is looking for content, falling ratings suggest that ITV's offerings are not what the viewing public wants. Coronation Street may be an exception, but note that Cadbury has just announced it's dropping its sponsorship; and
- there are rumours that both boards are divided on the idea of a merging.
So a combined entity would have large debts, poor programming, and the significant challenge of integrating the various businesses. I don't like it. And until advertising revenue looks like picking up I don't see any reason to own ITV on its own; the current discussions are a distraction from the job of finding a CEO and getting on with turning the business around. If I held ITV shares, I'd see this as a selling opportunity.
