Obstacles multiply for media giants' £8bn merger

When Michael Green and Lord Hollick unveiled the £8bn merger of Carlton Communications and United News & Media last week it seemed that two of Britain's most powerful media tycoons were rolling the dice in a gutsy move to avoid falling victim to a hostile takeover bid.

When Michael Green and Lord Hollick unveiled the £8bn merger of Carlton Communications and United News & Media last week it seemed that two of Britain's most powerful media tycoons were rolling the dice in a gutsy move to avoid falling victim to a hostile takeover bid.

However, in the aftermath of the deal it is apparent that the Labour peer and former special advisor to the Department of Trade and Industry, and Mr Green, the Carlton chairman, acted on signals emanating from the heart of the Labour government. Sources close to Chris Smith, the Secretary of State for Media and Culture, say he has grown increasingly convinced over the past 18 months that radical consolidation of the ITV sector, which is currently split among four main players, was not only inevitable, but desirable.

This thinking bears several aims. First, Mr Smith believed that the need for higher budget television production could only be met through greater economies of scale in production and distribution. Greater size, so the thinking went, would spawn greater willingness among broadcasters to innovate and invest in programme production, since the cost of a flop would be spread over a larger programming base. Earlier this year, for example, Mr Smith was alarmed by studies that showed television program exports, already swamped in value terms by imports, losing additional ground.

A second impetus to the Government's evolving view was that the ITV companies needed to become bigger to begin growing the scale necessary to compete abroad. Although even a wholly merged ITV, an ITV plc, would not rival European and American media giants like Mediaset or TimeWarner, Mr Smith believed it necessary to start moving Britain's television companies in that direction.

The third factor in Mr Smith's thinking ­ achieving the switch-off of analogue television before 2010 -­ was presented in his September lecture to the Royal Television Society's Cambridge conference. Before broadcasting's top table, Mr Smith made it crystal clear that the Government wanted digital television to succeed.

It was also stressed, albeit in more couched terms, that ONdigital, the Carlton-Granada digital terrestrial joint venture, would play a vital role, along with cable and satellite, to make digital ubiquitous. In this scenario, a stronger ITV, both financially and in programming, could be a key driver in persuading the 70 per cent of British homes who have resisted multi-channel television to subscribe. This would also increase competition in the pay-TV market ­ another key government objective.

Soon after Mr Smith's address, Lord Hollick and Mr Green began secret negotiations in earnest. Only two months later, Britain's biggest media merger resulted.

If it is clear that the Labour government seems prepared, in principle, to accept a United/Carlton merger, there are still several regulators that will scrutinise the deal.

Key among them is John Bridgeman, director general of the Office of Fair Trading. Since July, the OFT has been reviewing the voluntary undertakings extracted from Carlton, United and Granada to stay below a 25 per cent share of UK commercial television advertising revenue.

Mr Bridgeman's recommendations are normally passed to Stephen Byers, the Secretary of State for Trade and Industry. He can accept a clearance, reject it, agree to refer the matter to the Competition Commission, or require companies to give undertakings ­ as the three top ITV broadcasters did in 1994 following the previous round of network consolidation.

Part of the OFT review of the advertising market share undertakings would normally involve taking submissions from interested parties. This would include competitors to the ITV companies, such as BSkyB, as well as major advertisers, notably media ad buying agencies like Zenith Media and major advertisers such as branded goods concerns like Proctor & Gamble and Unilever.

It is understood that Mr Bridgeman expects to finish his inquiry into the ITV advertising share undertakings by February. Those deliberations will now take on a broader scope when Carlton/United officially file their merger proposal with the OFT in the next few days.

It is at this stage where BSkyB executives, following recent missives from Rupert Murdoch, could make a heated intervention before Mr Bridgeman. They could request that provisions limiting BSkyB to a maximum 20 per cent share in any ITV company be scrapped.

Alternatively, News International could play off progress at the OFT, and ultimately, the DTI, with further criticism of, say, the Government's delicately poised strategy for closer ties with Europe. Indeed, observers note that politicians may often warm to a proposal put discreetly in private, only to back away once the fuller political consequences of a change become publicly apparent.

The merger plan will also get a thorough vetting from the Independent Television Commission. The ITC will determine whether Carlton/United's viewership share falls inside the 15 per cent limit laid down in the Broadcasting Act. It will also assess the various commitments of the different ITV franchises to regional programmes and programming subject matter, such as news and drama.

A cursory glance at the ITC's latest viewership figures (see table), shows that Carlton/United squeek in below the 15 per cent threshold with a 14.9 per cent share of the total television audience for the year to September. However, what isn't known is how the ITC will treat United and Carlton's share of viewing audiences in other broadcasters where they have minority interests.

The bigger challenge could be posed by Channel 5, with a 5.2 per cent audience share, where United owns a 29 per cent interest. Yet since the proposed merger is so close to the legal limit, Carlton's 20 per cent interest in GMTV, the breakfast time franchise, will also be examined.

Putting aside regulatory and political uncertainty, there is also the question of how Granada Group will react. Chairman Jerry Robinson expected to lead the next wave of ITV mergers, much as Granada led the way in first round of consolidation in the mid-1990s.

Granada, meanwhile, is biding its time, waiting for the smoke to clear in the OFT's review of advertising limits. Though Mr Robinson may have been caught out by the Carlton/United deal, it is possible that he has a surprise of his own in store.