LONDON (Reuters Breakingviews) - A takeover of ITV seems an increasingly plausible plot twist. Shares in the UK broadcaster, which recently named budget airline easyJet’s Carolyn McCall as its next chief executive, have fallen about 15 percent in three months. Yet the company doesn’t look any less valuable, especially to a bidder prepared to brave a slowdown in the troubled free-to-air TV advertising market.
McCall’s task, when she starts next January, got slightly harder on Wednesday. Revenue at the broadcaster known for making “Love Island” and soap opera stalwart “Coronation Street” fell 3 percent in the first half of 2017 to around 1.5 billion pounds, mostly driven by an 8 percent decline in net advertising revenue.
Worries about a slowdown in TV ad spending, which media-buyer GroupM expects to shrink by 3 percent this year, have helped push ITV’s market value down by about 1.4 billion pounds in the past three months. Yet forecasts for 2018 operating profit among the 19 analysts polled by Eikon haven’t changed much. That could tempt a buyer such as Virgin Media owner Liberty Global - already an ITV shareholder.
Assume ITV investors accept an equity premium of around one-fifth – probably about right given slow growth. Including net debt of around 1 billion pounds, the purchase price would be 9.5 billion pounds. If a buyer could find synergies worth 160 million pounds – 20 percent of ITV’s 800 million pound forecast 2018 operating profit – the return on investment would be just over 8 percent. If synergies hit 40 percent of operating profit, say from slashing the company’s programming budget, the return rises to 10 percent, above ITV’s likely cost of capital.
What’s questionable is whether that’s high enough to cope with the risk of buying into a structurally-challenged sector. Free-to-air TV suffers doubly from the rise of digital streaming players like Netflix, which draw away audiences and push up content costs. Moreover, to bid now would be highly opportunistic – McCall hasn’t even begun to say what she’d do to change ITV’s strategy. But if the numbers work, and a buyer like Liberty feels confident, there’s no time like the present.
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