Jeremy Warner's Outlook: ITV's jam tomorrow story fails to inspire

Kitemarking makes little sense; Liberty carnage for short sellers
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The Independent Online

ITV has been a more or less perpetual disappointment to both investors and viewers for nearly a decade. Was there any sign of the clouds beginning to lift in yesterday's profits and trading update? Regrettably little.

About the only positive is that ITV has managed to stem the overall loss of viewers across its family of channels, though not its core ITV1 franchise. For the first time since the early 1990s, viewing improved if all the channels are taken together.

On ITV1, the fall seems not to have been quite as bad as at Channel 4 and BBC1, but clear scheduling problems remain, for which Simon Shaps, the former head of programming, recently paid the price with his job.

As for the rest, the picture continues to look grim. Pre-tax profits are down by more than a third to £188m, while the top-line growth the company aspires to again failed to materialise. Revenues were down 5 per cent to £2.1bn.

The cost of last year's phone-in scandal was one cause of this shortfall, while the continued drag on advertising revenue of Contract Rights Renewal (CRR) was another. More worrying, content sales were markedly lower, making the target set last September of doubling revenue from this division by the end of 2012 that much harder. The dividend has been held as a mark of confidence in the strategy for growth and the team put in place to deliver it, yet this seems to be more an act of faith than based on any visible sign of improvement. It must all be a bit dispiriting for Michael Grade, the executive chairman.

He's been in the job for more than a year now, and, although he's always insisted that there are no quick fixes, he'd have hoped at least to have plugged a few leaks by now. Instead, he's had to fall back on the familiar jam tomorrow story, which, though he now seems to have a top drawer team on board with 2008 starting in a relatively encouraging way, investors are getting a bit fed up with hearing.

As it is, much of the last year seems to have been spent worrying about the BSkyB stake. Mr Grade won himself few brownie points with shareholders by arguing that Sky should be forced to divest. What's been thereby created is a massive overhang which even if things were looking better than they are would act as a deeply depressing influence on the share price.

Online revenues are growing strongly, but are still tiny compared with free-to-air broadcast advertising, and certainly don't compensate for the damage the internet is in the round doing to ITV's revenues as advertising switches away from traditional media to online distribution.

Mr Grade always said the turnaround would be a slow, three-to-five year, job, and so it is proving. Investors have little option but to stay the course. There is still the possibility of regulatory relief, with the reform of CRR and the public service broadcast obligation, but that hardly amounts to a strategy for growth.

Charles Allen, Mr Grade's predecessor, complained bitterly after he was ousted that nobody could have done any better given the structural bind ITV finds itself in. By paying a quite full price for GCap, he's betting on radio being a doddle compared with broadcast TV.

Investors will continue to give Mr Grade the benefit of the doubt for a while longer, but the honeymoon, if there ever was one, is well and truly over, and if the advertising cycle heads south, as many expect it to, it will be all headwind in creating the value that investors have for so long craved.

Kitemarking makes little sense

The idea of "Kitemarking" for mortgage-backed securities, which the Government has been consulting on and may sanction shortly, is a well-intentioned, but largely impractical and pointless, gimmick highly unlikely to restart the securitisation market in the hoped-for manner.

It is none the less easy enough to see why the Treasury is eager to do something that might help put mortgage-backed securities back in business. Having nationalised Northern Rock, there are tens of billions in loans at present provided by the taxpayer which the Government must securitise or otherwise sell if it is to get its money back quickly.

There is also absolutely no chance of getting the three million new homes the Government aspires to have built by 2020 if the present mortgage famine persists. Somehow or other, the wholesale markets in mortgage funding have to be cranked up again to get anywhere close.

Unfortunately, Kitemarking, or as Alistair Darling, the Chancellor, has called it, creating a new gold standard for mortgage-backed securities, isn't the answer. Who would be responsible for the Kitemarking? Even if it were thought appropriate for the Government to get involved in assessing credit risk – in fact, this is a process which has to be left to markets if the politicisation of capital allocation is to be avoided – it certainly wouldn't want to because of the risk of being held accountable if things went wrong.

Mr Darling has already made it clear that he's not going to follow the US model, under which mortgage-backed bonds issued by Fanny Mae and Freddie Mac carry an implicit Federal Government guarantee.

The Financial Services Auth-ority would want to rule itself out for much the same reasons, while it would be just plain daft to expect the issuers to do their own Kitemarking. What about the credit rating agencies? Er, aren't these the guys that helped create the present implosion by mispricing the securities in the first place?

It is hard, in any case, to see what difference some kind of official stamp of approval would make. If even the covered bond market, where the security is backed not just by the collateral of the mortgage but by the issuing bank on top, lacks the confidence to trade properly, it seems rather doubtful that some kind of water mark posted on the wrapper will miraculously cause everyone to think everything is OK again.

Kitemarking may be a concept of some use in retail markets but it is completely wrong for professional wholesale investors, who have to be allowed to make their own decisions on credit risk based on what is already ample transparency for most mortgage-backed products.

Still, the Government has to be seen to be doing something, doesn't it? Meddle, meddle, meddle, and eventually so many tiers of bureaucracy will have been created that all hope of efficient markets will have disappeared. Governments only tie everyone up in red tape when they are beset by self doubt and are therefore prone to take on board any madcap idea they think might persuade the public they are taking the problem seriously. We seem very definitely to be entering the Dangerous Dogs Act phase of this Government.

Liberty carnage for short sellers

Liberty International is one of the most heavily "shorted" stocks in the FTSE 100, or at least was until our story yesterday suggesting that the company might be acquired by a rival to create the world's largest shopping malls group.

No surprise, then, that I was angrily called yesterday by a couple of the short sellers to be told that the Indy had fallen victim to a blatant attempt to manipulate the price. Leaving aside the issue of pots calling the kettle black, and indeed whether it is possible to feel any sympathy at all for losses thereby inflicted on speculative short sellers, my answer is that I don't think so.

Something is afoot. It may not come to anything, but Sir Donald Gordon, a near controlling shareholder, seems to have become a seller, and there would be at least two willing buyers assuming an agreement on price could be reached. As for the shorts, they live and die by the sword. It's good to see them getting their comeuppance.

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