Advertisers breathe easy after botched ITV merger

News of an aborted &£5bn merger between Carlton Communications and Granada Television last week set rival broadcasters and advertisers wondering how the executives at the two main ITV companies had hoped to elude regulatory restrictions had the deal gone ahead.

Uppermost in their minds was the fact that if Carlton and Granada had merged, their combined sales operations would account for 56.5 per cent (&£1.7bn) of the UK’s &£3bn-plus TV advertising revenue. It is this dominance of the market, in which smaller rivals such as Channel 4 and Channel 5 have percentage shares of about 20 and 6.4 respectively, that worries advertisers.

Procter & Gamble associate director of UK media Bernard Balderston says: “You can take it as read that a consolidation of ITV, at its present level of total market share, would be vigorously opposed [by advertisers]. The competition authorities would inevitably be involved.”

Incorporated Society of British Advertisers director of public affairs Ian Twinn says: “Our basic position is that we are opposed to a single ITV on competition grounds – a single sell of airtime would be bad for advertisers.”

Independent Television Commission (ITC) rules operate to stem concerns over market dominance by providing that there can be no joint selling of airtime by Granada and Carlton, and the two London Channel 3 licences.

At last week’s Institute of Practitioners in Advertising (IPA) conference, Channel 5 deputy chief executive Nick Milligan warned his channel “would cease to exist” if Granada and Carlton were allowed to merge and sell airtime through a single sales operation. But he added that a compromise solution – of one ITV network selling through two sales houses – would be acceptable subject to tight regulation.

For more than two weeks, executives at Carlton and Granada have worked with lawyers devising a plan that would evade these restrictions by providing for two ITV sales houses, one owned by the merged entity and the other independentlyowned.

At least one report has said that Carlton’s sales operation would have been closed down and the sales for Carlton’s regions would have to have been contracted out to an independent sales house. It is likely this move would have coincided with the management at Carlton’s sales operation setting up their own sales house, backed by private equity funding to bid for the contract.

Channel 4 commercial director Andy Barnes believes that there would inevitably be “collusion and exchange of information” between the two sales houses. The independent sales house would effectively still be dependent on a consolidated ITV and the merged entity would in turn expect a sizeable portion of its income to come from the independent sales house.

He says: “We would definitely oppose the coming together of Carlton and Granada until the combined company was significantly smaller in size, which in competition terms is a third of the market, and that’s some years away.”

In the past, Channel 4 has been linked to talks with Channel 5 and other sales houses about setting up joint operations to counteract a single ITV. But any such merger would effectively be prevented by ITC rules, which only allow smaller sales houses (with a national advertising revenue share of less than five per cent) to band together in order to compete effectively in a consolidating market.

Flextech Sales managing director Mark Howe recognises the need for a strong ITV, which he says benefits the TV market as a whole in the face of increasing competition from radio and outdoor media. But he asks: “If you have one ITV, how can you have two sales points – Chinese walls don’t exist if you have the same owner?” If one of the sales houses were to be independent then it “would have to compete as if it was in an open market”.

But Carlton and Granada’s solution to the sales dilemma would go some way to meeting IPA proposals put forward in response to a Government consultation exercise on the regulation of ownership in UK media.

The IPA says that where a media owner’s share of sales revenue within a specific medium exceeds 25 per cent, it should be required to operate the percentage of sales above that cap through an independent sales company. But Jim Marshall, chief executive of MediaVest and chairman of the IPA’s media policy group, warns that any solution would have to be monitored by regulators to ensure that there was “no collusion and no exchange of information”.

Initiative chief executive Jerry Hill believes that Carlton and Granada’s sales operations should be treated equally and both be put into independent sales companies “with a corporate constitution uncoupled from ownership”.

Apart from advertising issues, the merger, which would have resulted in &£50m cost savings and given Granada shareholders 60 per cent of the merged entity and Carlton’s the remainder, faced another hurdle. Under current legislation no single commercial broadcaster is allowed to have more than 15 per cent of the total TV audience or to own Carlton’s London franchise and the London Weekend franchise, currently held by Granada.

Although the Government has signalled that it will scrap both these rules under new communications legalisation due next year, a merger of Carlton and Granada would have come uncomfortably close to the 15 per cent limit.

Under the merger plans, Carlton’s broadcasting licences would have been put into an unquoted company, shares of which would have been distributed along with the shares in the new merged publicly listed company, according to one report. The operation of its TV franchisees would have also been contracted out to the merged company.

But the rise in Carlton’s share price on Tuesday on the back of false speculation that German company Bertelsmann Media Worldwide was about to bid for the company, forced it to break cover before the deal with Granada was finalised. Both Carlton and Granada deny that the deal had broken down over a dispute over the future of ITV Digital, saying instead that the balance between “risk and reward” was not right. It may be that the appointment of Deloitte & Touche to advise on the restructuring of ITV Digital could result in savings through the renegotiation of sports and carriage rights, which would make a merger stack up to the financial satisfaction of both Carlton and Granada’s shareholders.