CITY WATCH

We should remember that when Rupert Murdoch brought BSkyB to market, we said that the business was beset by problems. BSkyB has since made good for investors, but if we thought otherwise at the time it does us all good to contemplate a flotation that really is accompanied by some alarming corporate issues.

Silvio Berlusconi is bringing part of his Italian media empire, Mediaset, to a flotation. Not only were arrest warrants issued last week for seven senior executives of Fininvest, Mediaset’ s parent company, while Berlusconi himself has not yet finished with the prosecutors over his control of pay-TV company Telepiu, but Mediaset could be hit with a hefty tax bill if Fininvest is found guilty of tax evasion.

These idiosyncratic corporate factors should not necessarily dissuade international investors from partaking in the Mediaset flotation – it may, after all, have to be sold at a giveaway price.

Back to the London market. And the picture in media stocks is a pretty reasonable one as we approach the calendar half-year. The sector has outperformed the market indices by some 15 per cent this year and was the largest contributor to the market’s performance in the first quarter. Shareholders will be wondering whether the bubble may burst, particularly if cross-media ownership remains restricted in the forthcoming Broadcasting Bill.

The truth appears to be that the sector is still comparatively cheap, offering an earnings growth premium of 48 per cent for 1997 and trading at a PIE relative premium of 44 per cent. So the media sector is relatively attractive, given the lacklustre growth prospects elsewhere in the markets.

NatWest Securities analyst Neill Junor consequently reckons that there is “scope for positive momentum in revision to earnings estimates for EMAP, Reuters and Reed”.

NatWest expects strategic consolidation in the terrestrial television market to continue. The obvious beneficiary in terms of speculative investment will be Yorkshire TV, as we await a move from a predator on the other side of the Broadcasting Bill. Granada, Carlton and United will dominate terrestrial television for the time being.

The longer-term market for UK television shares is likely to be driven by those companies that develop subscription channels in the digital era. Apart from the obvious players mentioned above, investors should not overlook BSkyB. And, for that matter, Pearson could show some improvement, given its developing distribution network and programming resources.

As far as the UK’s first cross-media merger is concerned, NatWest reckons that “big is beautiful” and that the merger significantly enhances the merged group’s ability to expand through further acquisition. Nevertheless, NatWest does not necessarily share the enthusiasm of Lords Stevens and Hollick for the deal.

At the time of the merger, it described the result as “a sprawling media entity”. The reasons for NatWest’s doubt spring from the fact that the Express had long depressed United’s rating, while the money-broking entities at Hollick’s MAI had depressed its rating. These two businesses, taken together, account for some 30 per cent of the merged group’s operating profit for 1995. Still, it’s no Mediaset.