QUALIPORT
Competition Watchdog Tips ITV

By Maynard Paton (TMFMayn)
October 16, 2003

The Competition Commission is not a traditional source of stock market tips. However, investigations by the competition watchdog can highlight shares worthy of a buy and hold portfolio. It's the Commission's role to assess takeovers and mergers that could restrict rivalry within a particular sector. Those businesses that undergo a Commission's inquiry often have few opponents or are a dominant industry force and, as such, could make for a good long-term investment.

Following five months of analysing the proposed merger of television broadcasters Granada (LSE: GAA) and Carlton Communications (LSE: CCM), the Commission last week provided some wonderful insights into the competitive strength of ITV.

Ructions

The decision to give the merger the go-ahead -- and allow Granada and Carlton to control 52% of the television advertising market -- caused ructions among other broadcasters and advertisers alike. Many had submitted their views to the Commission and the following extracts, taken from the Commission's report covering 'interested parties', reveal the inherent power of ITV.

"[Following the merger] advertisers would... receive less value for money. Non-ITV sales house, such as British Sky Broadcasting (LSE: BSY), would by definition find that their share of net advertising revenue was correspondingly lower."

"Channel 4 said that the proposed merger... would lead to a decisive shift in UK television advertising in favour of the merged group."

"[Channel 4 said] all the key factual findings by the Competition Commission in 2000 remained unaltered: Indispensability of ITV to advertisers... No material new entry to the market..."

"Channel 5 said that a combination... would make [Carlton and Granada] the dominant participants in the market and reinforce their ability to price ITV advertising at a supra-competitive level."

"The proposed merger... would have negative consequences on the UKTV-Flextech business [and would] lead to a significant lessening in competition in the television advertising market."

Advertisers

"No other commercial television channel, on any platform, offered Dixons (LSE: DXNS) the opportunity to reach mass audiences quickly."

"No other non-television medium delivered the same features as ITV or could be substituted for ITV advertising."

"Further consolidation would significantly reduce competitive pressures, which were already low."

"The barriers to entry were extremely significant and market share took considerable time to acquire."

"GlaxoSmithKline (LSE: GSK)(NYSE: GSK) believed that a dominant ITV broadcaster... would result in a substantial lessening of competition in the marketplace and provide a real opportunity for potential abuse of the market."

"For GSK, using these [alternative channels] was very much a second best or last resort option as no other television channel or medium offered the strengths of ITV..."

"Masterfoods, a division of Mars UK, was opposed to the merger. It said that television was an essential medium for its business to use in advertising its brands, and was overwhelmingly more important than any other medium."

"The Incorporated Society of British Advertisers contended...ITV was indispensable for certain advertisers' needs, in particular to reach both mass and occasional audiences quickly for immediacy of impact, to create 'fame' and 'superbrands' and to comply with demands from retailers. There was a direct correlation between ITV advertising and product consumption."

So, all good stuff for 'ITV plc'. Of course, rival broadcasters and advertisers may have overstated the issues for their own cause, but with 2.5 times as many adults tuning in to ITV than Channel 4 (ITV's largest commercial rival in terms of audience share), the lobbying had obvious merit.

Value

Though ITV's business quality looks good, sadly there's no obvious value in a Granada/Carlton combine at present:

Company     Share      Market     Forecast pre-tax
            price      value          profit
             (p)         (£m)           (£m)

Granada      114       3,163            155
Carlton      210       1,411             66

Total                  4,474            221

Consider a projected £55m of merger synergies and tax at 30%, the prospective price to earnings (P/E) multiple comes to 23 (or an earnings yield of 4.3%).

The other listed network broadcasters are SMG (LSE: SMG), owner of the Scottish and Grampian franchises, and Ulster Television (LSE: UTV), holder of the Northern Ireland licence. Given the latest competition ruling, SMG and Ulster are likely at some point to find themselves part of a single ITV company. But there's no rush to find value in these shares, either.

At 110p a share, SMG is valued at 21 times earnings and recently had to sell off its newspaper business to reduce a debt mountain. It also has subsidiaries involved in cinema and outdoor hoarding advertising, which are by no means television-type franchise operations.

With a 386p share price, Ulster also trades on a P/E of 21. It has by far the best financial record of all the ITV companies and operates the best-performing network franchise. Ulster will certainly remain on the Qualiport's watch list, but ITV plc, when it forms, should also be worth monitoring.

More: Competition Commission website

The author owns shares in GlaxoSmithKline.