City Republic: Opportunities for ITV investors

LONDON - Growth in the independent TV production sector might offer ITV investors some new opportunities, writes Stephen Foster.

Grade strategy under fire at ITV
Looked at one way, Michael Grade has done a good job at ITV. Ratings have stabilized and in some sectors increased and he still has new programme boss Peter Fincham's contribution to come.

From an investor's point of view the situation isn't quite so rosy, with the shares trading at half their year's high, cutting the value of the company from £4.4bn to £2.2bn.

Investors have three choices: hope for a bidder (unlikely just now); wait for the Grade strategy to lead to higher profits and a re-rating of the shares; or push for something radical, like a break-up of the company.

One of the few sectors of the media market that has done well recently is the independent production sector, making (relatively) big money from licensing programme formats as well as selling programmes into overseas markets (Simon Cowell being the most notable example).

In many ways companies like Cowell's Syco are calling the shots in broadcasting now, with the likes of ITV desperate to broadcast their formats.

ITV is still the UK's biggest programme-maker after the BBC and one of the biggest in Europe.
If this part of the company was spun off, investors would get a lot of their money back. And the remaining channels' business would probably be snapped up by another broadcaster.

This goes flat against the Grade strategy of reviving a unitary major commercial broadcaster but some analysts think Michael needs to think again.

Gloves come off in the City
City traders are fond of bashing each other up from time to time, in the cause of charity naturally.
But there's a world of difference between the amateur blows traded in the Broadgate Centre by Liverpool Street station and the real rumble going on at the moment between the regulators, the Bank of England and the Financial Services Authority, and the banks and hedge funds.

Last week, the FSA announced that it was going to demand that short traders disclosed their positions in rights issues.

Short traders borrow stock for a fee in the belief they can sell it cheaper later as a share falls and pocket the difference in price as they return it.

Supporters say this increases liquidity (turnover) in the market. Critics say it undermines perfectly good companies.

Some pundits think about half of current City transactions are by short sellers, putting a fearsome pressure on the companies in question.

In a rights issue (such as bank HBOS's current capital-raising exercise), a floor price is stated for the new shares and if they fall below this they get left with the underwriting investment banks, which means that one bit of the City is screwing another.

And it obviously means that the company raising the money finds it harder, and pays more for the privilege, than it would otherwise do without the short sellers' intervention.

Some critics would like to see stock lending, without which short-selling would lose its appeal, banned altogether. In fact it's hard to see why supposedly long term holders, like insurance companies, lend stock in the first place.

They get a fee, sure, but their 'long term' holdings may be fatally undermined.

The FSA has now acted in limited way and the hedge funds are bleating away (as usual). But HBOS shares soared on Friday as hedge funds raced to cover their short positions.

So round one to the FSA.

This morning The Daily Telegraph reports that some hedgies have suffered big losses betting that market inflation expectations will fall, after previously pushing up said expectations.

With the Government, the Bank of England and, indeed, consumers deeply worried about inflation, this, if proven, would be a case of market manipulation on a panic-inducing scale.

The hedge funds keep saying that they'll leave the country if the regulators make life too hard for them.

At this rate they could be run out of town, whether they want to go or not.

There's trouble in the press sector too
Trinity Mirror CEO Sly Bailey is coming under pressure to produce a growth strategy for TM (owner of the Mirror newspapers), partly because of fears that TM's 10,000 pensioners are proving an increasingly expensive burden.

Pensioners are a delicate issue at the Mirror of course, after Robert Maxwell's notorious raid on the pension fund, but supporting these formerly well-paid people is proving an onerous burden.

So far Bailey, a former IPC ad manager, has concentrated on cost-cutting and investing in online recruitment sites but, like Michael Grade at ITV, some investors are beginning to think that something more radical is required.

Meanwhile, over at Independent towers, the ruling O'Reilly clan is under pressure from Irish mobile phone magnate Denis O'Brien, who wants to sell off the UK Independent and Independent on Sunday to concentrate on the profitable Irish and overseas titles.

O'Brien, whose stake is at 25%, can be a nuisance as he can block some boardroom resolutions.

You don't need to be a publishing genius to notice that the Independent papers are looking decidedly under-nourished these days in terms of ads, being a fraction of the size of quality rivals like the Guardian and The Times.

The papers still contain much excellent journalism but that doesn't seem to be enough these days.

As the advertising market tightens further, the stance of the owners at the Independent and the Mirror will be put under pressure.

Stephen Foster is a former news editor of Campaign, former editor of Marketing Week and Evening Standard ad columnist. He is a partner in Editorial Partnership and writes the blog www.editco.net and Politics of the Media for Brand Republic.

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