Shuffling the fourth estate

Players in the media industry are preparing for a major reshuffle of assets following the publication of the proposed Communications Bill last week. The bill heralds a change in the rules relating to mergers and acquisitions.

Media stocks soared after the publication of the draft bill on the back of predictions that it would unleash a wave of takeovers. But some of the UK’s advertisers – who foot the bill for commercial media – were not happy, as they see the bill adding to the power of media owners, and weakening that of advertisers to strike advantageous sales deals.

Media owners – surprised by the Government’s move to open up the UK broadcasting market to US players for the first time, and the extent of the bill’s de-regulatory approach to cross-media ownership – are waiting to see which one of them will be the first to lay their cards on the table.

The bill paves the way for a single ITV, a possible acquisition of Channel 5 by Rupert Murdoch and – by scrapping the points system preventing radio groups owning more than 15 per cent of the total audience – a raft of mergers in the radio sector.

Market speculation

There is much speculation by City analysts, once the bill becomes law in 18 months, about the possibility of Disney, Clear Channel, Viacom and AOL Time Warner taking ownership of UK broadcasting assets. These include Channel 5, ITV’s main shareholders Carlton Communications and Granada, as well as Capital Radio. In addition, Bertelsmann – the German-based global media company, which owns 65 per cent of RTL – may also make a play for ITV.

Share prices of media stock soared after the bill was published, so much so, that on Monday (May 13) Jazz FM’s shareholders delayed accepting a hostile takeover bid made by Guardian Media Group, which controls 18.5 per cent of the shares. The reason for holding off on the deal was that the share price had risen to more than the 180p originally offered by Guardian Media Group.

On the face of it, the bill – which makes no explicit mention of “advertiser” interests, scraps the rule preventing the single ownership of ITV and encourages media consolidation – does little to protect the band of marketers that effectively pay for commercial radio and TV.

The Institute of Practitioners in Advertising (IPA) Media Policy Group chairman and chief executive of MediaVest, Jim Marshall, says: “While the bill is more liberal than expected, the biggest concern still remains. Where is the recognition and protection of advertiser interests?”

Keen to ensure a free and open advertising sales market, the IPA had been seeking ownership limits for sales operations – set at 25 per cent of sales within each medium and 15 per cent across all media.

Marshall adds: “Although the bill addresses some of the main cross-media ownership issues, it does not examine media sales houses.” He says that the IPA will continue to push for a rule restricting ownership limits for sales operations.

The importance of advertisers

Meanwhile, both the IPA and the Incorporated Society of British Advertisers (ISBA) are seeking clarification on the extent of the powers of the proposed new regulator, the Office of Communications (Ofcom), with regard to competition issues. Furthermore, they will both continue to press for the BBC to be fully regulated by Ofcom, in line with other broadcasters.

In the light of legislation that includes the forthcoming Enterprise Bill, Ofcom will be given powers concurrent with the Office of Fair Trading (OFT), the ability to apply competition rules, as well as review mergers in the communications sector.

Although the bill states that the two bodies will consult before any investigation, in practice it is likely that competition issues in broadcasting, which are at present dealt with by the OFT, will fall to Ofcom.

ISBA director of public affairs Ian Twinn says: “ISBA has had difficulties in the past convincing the competition authorities of the importance of advertisers as part of the media mix.”

He hopes that this will change as, under the bill, Ofcom has a specific duty to serve the interests of “customers” for the services it regulates, in respect of “choice, price, quality of service and value for money”. On this basis, Twinn believes Ofcom has a duty to protect advertiser interests, and that competition issues will be determined with regard to media owners’ share of advertising within each media sector as well as the market as a whole.

It is precisely this part of the bill that is causing some industry experts to pour cold water on the idea of a media merger fest, generated by analyst speculation and newspaper reports.

Tim Schoonmaker, chief executive of EMAP Performance – part of EMAP, which owns Kiss and Magic in London, eight radio stations in the North of England, as well as magazine, trade press, and TV interests – warns against assuming that the Communications Bill will trigger a host of media takeovers.

He says: “I do not think it is going to be a free for all. The bill is very detailed and includes a lot of regulation. With Ofcom acting as a competition regulator with the power to stop mergers happening, mergers are going to be stopped. If one out of two regulators [Ofcom or the OFT] says no, it won’t happen. That will be really confusing, and a great opportunity for lawyers.”

Change of emphasis

The Enterprise Bill, claims GWR public affairs director Simon Cooper, will also change the basis on which mergers are investigated. At present the Competition Commission and OFT checks to see if a merger gives a company a dominant position in a market. Under the Enterprise Bill, the requirement will be to see whether competition has been significantly diminished.

In the radio sector, Cooper believes that there will be scope for plenty of consolidation and that a concentration of advertising sales points will not lead to regulators blocking mergers when put in the context of the wider market of radio versus TV, press or other forms of media. He argues that if a radio network were to achieve a monopolistic position, then advertisers would migrate to other media.

But any marketing manager planning a media schedule knows that it is the balance between different media that can determine the success of a campaign. Consolidation of media owners, whether within a particular sector or across all media, tends to weaken the position of advertisers.

Initiative Media chief executive Jerry Hill warns that advertisers and their agencies will have to be aware of the potential dominance of multi-media groups that will be thrown up by the bill’s relaxation of media ownership rules.

Dominant parties

Speaking at the Royal Television Society last week, on the ramifications of the Communications Bill, Channel 4 chief executive Mark Thompson also warned of the increasing danger of “dominance” within TV ad sales. He said: “Those close to the Government are confident that the competition authorities alone will be sufficient to stop effective market dominance in airtime sales, for instance by a merged ITV. We feel less confidence than they.”

A variety of different media deals could be triggered by the bill once it comes into force, which might lead to the dominance of TV – by a merged ITV – or across the media as a whole – by a media conglomerate, such as Bertelsmann.

For Clear Channel, which owns a raft of TV and radio stations in the US, as well as radio interests elsewhere, including a minority stake in Jazz FM, prime targets could be Virgin and Capital Radio, as well ITV. Disney – owner of US network ABC – and Viacom – owner of MTV and CBS – could both be interested in Capital Radio, ITV or Channel 5, presuming the latter’s shareholders United Business Media (35 per cent) and RTL were prepared to sell. But Disney and Viacom could face competition for Channel 5 from AOL Time Warner and Rupert Murdoch’s News Corporation, which would be able to use the channel to cross-promote satellite channels.

However, Murdoch will be barred from taking over ITV unless he sells his UK newspaper interests, which include The Sun and The Times. This is because the bill states that any newspaper group with more than 20 per cent of the national market is not allowed to own a significant stake in ITV. The media mogul could also theoretically add to his UK assets by taking full control of TalkSport, allowing him to cross-promote The Sun. Bertelsmann, on the other hand, could acquire radio stations in the UK, as well as ITV, without having to sell its 65 per cent stake in Channel 5.

But it is at least 18 months until the bill becomes law. Meanwhile, Bertelsmann and other companies interested in ITV are free to build up stakes of up to 20 per cent in each of the two main ITV shareholders, Carlton and Granada.

Now rid of the distraction of ITV Digital, Carlton and Granada could also decide to pursue the merger they abandoned earlier this year, subject to approval from the competition authorities. However, one media agency insider believes that, in the light of the Communications Bill and in preference to a merger, there will be pressure from the two companies’ respective shareholders to hold out for the best take over bid. This will make it hard for the newly appointed joint managing directors of the ITV network – Granada Broadcasting and Enterprises managing director Mick Desmond and Carlton Channel chief executive Clive Jones – to work to the same agenda.

But a TV industry insider claims that Carlton and Granada have about 65 per cent of shareholders in common, and that an eventual sale of a merged ITV would give shareholders a bigger premium. He also points out that US media giants are traditionally conservative and may prefer to make a move on a merged ITV.

Compromise

If Carlton and Granada do merge before the bill becomes law, industry insiders believe that ITV will have to operate two independent sales houses, in order to satisfy competition authorities and protect advertisers. ISBA’s Twinn draws comfort from the fact that the bill explicitly states that any proposed ITV consolidation would have to be scrutinised on competition grounds.

However, one industry insider claims that few restrictions would be placed on a single ITV, as the competition authorities will look at share of total advertising revenue once the bill becomes law. ITV’s share could well be less than 15 per cent and be dwarfed by a Murdoch empire that included Channel 5, a number of radio assets, BSkyB and newspapers interests.

City analysts also predict that the bill, by scrapping radio’s points system, could trigger consolidation in the sector. Lorna Tilbian, an analyst Numis suggests the number of radio players will fall from eight to four in addition to the BBC. This four will be centred around Capital – which is likely to be sold – the Daily Mail & General Trust – which is expected to buy GWR – EMAP, and possibly a merged Scottish Radio Holdings and SMG.

Consolidation in the newspaper sector could also be aided by the bill’s lighter-touch approach, which removes the need for the prior consent of the secretary of state in relation to the transfer of titles.

Media merger hype may have pushed up the price of shares, but it will be 18 months before the market sees how the competition authorities will react to any deals.

OFFICE OF COMMUNICATIONS (Ofcom) will take on the responsibilities of the following:

ITC (Independent Television Commission)

Broadcasting Standards Commisssion

Oftel (Office of Telecommunications)

RA (Radiocommunications Agency)

Radio Authority

COMMUNICATIONS BILL

The bill establishes a single regulator, the Office of Communications (Ofcom) to replace the Independent Television Commission, the Radio Authority, Oftel, the Broadcasting Standards Commission and the Radiocommunications Agency.

Ofcom will have powers concurrent with the Office of Fair Trading to apply competition rules in the communications sector.

The Bill scraps rules preventing:

single ownership of ITV

non-EU ownership of some broadcasting assets

ownership of more than one national commercial radio licence

joint ownership of TV and radio stations

large newspaper groups from acquiring Channel 5 or radio licences

Key limits imposed on cross media ownership:

any newspaper group with more than 20 per cent of the national market will not be able to own a significant stake in ITV

prevention of anyone owning all the newspapers and the regional ITV licence in any region or major city

a scheme to ensure that at least three commercial local or regional media voices exist (in newspapers, TV and radio) in addition to the BBC in almost every local community.