Carlton sets its sights on pay-TV

The Investment Column

As media moguls go, Michael Green, chairman of Carlton Communications, keeps a very low profile. There is no sign of his personal image changing, but his reputation as an over-cautious deal-maker in the fast-changing world of television may be about to disappear.

Last month he nipped in to steal south-west of England ITV franchise- holder Westcountry Television from under the nose of Lord Hollick, United News & Media's acquisitive chief executive, with a knock-out bid of pounds 85m.

It was third time lucky this year for Mr Green after the Labour-leaning peer beat Carlton to the punch when his MAI group merged with United News & Media. United also pipped Carlton in picking up a 20 per cent stake in HTV, the Welsh broadcaster, from Scottish Television.

Yesterday Mr Green gave his clearest signal yet that Carlton intends to be a serious player in the brave new world of multi-channel subscription and pay-per-view television. "We want to build up our interests in pay television, both as a content provider and operator," he said. "This may encompass cable, satellite and digital television."

Carlton already has two small cable channels, but it sees the new media, in particular the advent of digital terrestrial television, as opening up new investment vistas while being complementary with its free-to-air, advertiser -supported ITV licences. The latter include the London weekday franchise and Birmingham-based Central.

Mr Green's enthusiasm for the potential of pay-TV appears to have grown since the Department of Trade and Industry published its "near-final" guidelines on the regulation of digital television last month. Carlton, other commercial broadcasters and the BBC had lobbied the Government to ensure that the digital set-top boxes due to be introduced next year by Rupert Murdoch's BSkyB will be open to all.

Mr Green insists that Carlton's core business in terrestrial television remains a "significant asset", delivering mass audiences to advertisers. And it would be wrong to assume from results for the year to September that good, old-fashioned free TV has had its day. True, operating profits from television rose a measly 5 per cent to pounds 129m on sales just 2 per cent higher at pounds 686m, while profits at the group level advanced 17 per cent to pounds 291m on turnover 6 per cent up at pounds 1.68bn.

But Carlton, which accounts for almost a third of the ITV advertising cake, says the outlook for advertising revenue is good as the economy continues to grow, noting strong growth in adverts for telecoms and cars recently.

Elsewhere Carlton's film (Technicolor) and video activities go from strength to strength as technological advances shorten the time it takes blockbusters like Toy Story or Twister to move from the box office into video formats.

Pre-tax profits for the current year should rise to pounds 340m from pounds 295m, implying a p/e ratio of 15, with the shares down 14p at 489.5p. About right.

MMC worries sour Bass's year

Bass may have had glad tidings about job creation and capital investment yesterday but the shares remain over-shadowed by another issue entirely: the possible referral of the proposed Carlsberg-Tetley deal.

With no decision from the DTI and the prospect of a lengthy MMC investigation looming, the shares have been in limbo at around the 800p mark. If the deal does go through, Bass will have to sell some of its tenanted pubs to comply with possible OFT-DTI demands. If it is refused, or the conditions are too onerous, the deal may have to be unravelled at a net cost of around pounds 60m.

Leaving aside the uncertainty of the Carlsberg-Tetley saga, Bass looks in good shape. Like Whitbread, it is pushing its branded pubs and restaurants for all they are worth. New and converted branches of Harvester, O'Neills and the rural Fork & Pitcher pubs are being opened rapidly.

The driving force is robust food sales, which increased by 54 per cent across the group last year. Food now accounts for 16 per cent of sales in the group's 2,700 managed pubs.

In brewing, old favourites such as Carling Black Label managed to increase sales by 5.7 per cent, while some of the new brands are racing ahead. Caffrey's, one of the earliest nitrokeg beers, has seen volumes rise by almost 50 per cent year-on-year. Then there is Hooper's Hooch, the dominant brand in the fizzing alcopop market. Bass sold 320,000 barrels of the stuff last year, compared with just 40,000 the year before. Bass reckons that consumers will absorb the 40 per cent rise in duty announced in last week's Budget. Hooper's has also been launched in 30 countries, with Japan proving particularly fertile ground.

Bass's problem areas are bingo and Holiday Inns. Bingo admissions were down by 13 per cent in the year. Though Bass is closing its older "ex- cinema" halls in favour of larger, "flat floor" clubs, halting the decline in the face of National Lottery will prove tough.

At Holiday Inns, operating profit was 19 per cent higher at pounds 195m though there are concerns that the rate of growth is slowing. Occupancy rates appear to have plateaued and some analysts feel there may be only one year's real growth left in this division.

Merrill Lynch is forecasting 1997 profits of pounds 741m which, with the shares up 2p at 813p yesterday, puts them on a forward rating of 15. A solid bet in a sector set to benefit from the uplift in consumer spending.

TLG heading for brighter times

The lights flickered at TLG earlier this year. In retrospect it perhaps ought to have been clear when we tipped the commercial lighting group in June after a cracking set of maiden annual results that TLG could not swim against deteriorating markets forever. All five of its main markets fell off a cliff at once in August, forcing the group to issue a profits warning which has left the shares languishing at below the 115p offer price of two years ago.

But the market breathed a sigh of relief that interim figures showing pre-tax profits slashed from pounds 11.4m to pounds 8.3m in the six months to September were no worse than the much-reduced expectations and the shares picked up 10p to 103p yesterday.

With sales virtually flat at pounds 187m, the past six months have been bloody for TLG, once an arm of Thorn. In the UK, prices fell as competition for large lighting jobs intensified, while the Continent was hit by governments taking action to rein in public spending ahead of expected monetary union at the end of the century. Between 25 and 40 per cent of TLG's sales on the Continent are ultimately dependent on state contracts, ranging from municipal street lighting to government offices.

TLG has done well to hold its own or improve its market share in all its markets, which contracted by between 2.8 per cent in the UK and 9.5 per cent in Germany during the first half. The group has restructured management and reckons cost-cutting measures will deliver savings of pounds 3m in a full year.

With net cash of pounds 3.2m and a 9.5 per cent market share, second only to Philips, TLG has plenty of scope to acquire in Europe. Meanwhile, it is just scratching the surface in the Asian market, where it is starting its first manufacturing facilities in the revamped joint venture with Jardine Pacific.

Profits of pounds 22.5m in the full year would put the shares on to a forward multiple of 13. The brave will follow managing director Thierry Vayssette, who has just bought 26,657 at 99p. The more cautious will wait while the company restores its reputation in the City.

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