Jeremy Warner's Outlook: Another regulatory breakthrough makes ITV a sitting duck for foreign predators

Beware private equity bearing gifts; Disengaging from UK equity markets
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This would have fallen to about £180m this year in any case as a result of the so called "digital dividend", which dictates that the more viewers who switch to digital, the less ITV has to pay for its analogue spectrum. The breakthrough Mr Allen has achieved is to persuade the regulator, Ofcom, to cut the fixed charge ITV pays each year from more than £70m to just £4m with immediate effect.

This was considerably more than the City was expecting, reducing total franchise payments from £215m in 2004 to less than £80m this year. As more viewers switch to digital, even these payments will fast waste away until by the time of the analogue switch-off in 2012, ITV is paying just £4m a year. Mr Allen couldn't have hoped for a better outcome.

Much is written and said about how in creative terms ITV is going down the drain. The most recent edition of Prospect magazine bemoans the loss of ITV's contribution to "great television across so many genres". Yet the world has changed and ITV must today struggle to survive in a much more competitive media landscape.

The luxury afforded by monopoly of providing high-brow programming becomes ever less tenable in a world of multi-channel TV, and though a diet of Footballers' Wives and I'm a Celebrity Get Me Out of Here! would seem no substitute for past glories such as The World at War and The Sweeney, in financial terms at least ITV seems fast to be finding its feet once more.

The reason the core ITV channel is losing market share is not because its programming is poor, but because it now has to compete with so much else. As viewers switch from the comparatively limited choice of analogue to the myriad of channels available on digital platforms, its share of peak-time viewing tends to fall from 27 per cent to 22 per cent. Yesterday's ruling means that the consequent loss of advertising revenue is more than compensated for by the reduction in the amount it pays for its analogue franchises.

ITV reckons still to spend about £250m a year on its public service broadcasting obligations. Mr Allen would like to shed these obligations too. It is in any case hard to see how he could be held to them after the analogue switch-off. Yet these are matters the Government has yet to decide. Should a new public service channel be set up to act as a foil for the BBC, as suggested by the regulator Ofcom, or should money be made available from the licence fee to fund public service programming on existing networks, as suggested by Mr Allen?

Whatever the answer, ITV seems to be managing the shift into the brave new world of multi-channel TV with a skill few would have thought remotely likely just a few years ago. Potential bidders have held back up until now. Yesterday's concessions may tempt them out of the woodwork.

Beware private equity bearing gifts

There's an old joke in private equity which asks: "When do you start planning your exit?" Answer: "The day after your entry." Most private equity players none the less expect to have to sit on their assets for some years before attempting to refloat them on the stock market or sell them to others.

Not so TDR Capital, which in partnership with Capricorn Ventures took PizzaExpress private less than two years ago and is now actively trying to recruit a new chairman in preparation for a possible flotation this year. The most likely candidate is David Ross, the co-founder of Carphone Warehouse.

What will be brought back to market is admittedly a larger enterprise than the original PizzaExpress. The business has since been bulked up with the acquisition of the rival pizza chain, ASK Central. The grilled chicken chain, Nandos, might be thrown in for good measure.

Yet isn't there an almost indecent haste in the speed of this turnaround? When refloated, the company will be actively marketed among the very same investors who sold just two years ago. In the meantime, the company's two private equity acquirers will have earned a return of well in excess of 100 per cent.

Two of PizzaExpress's original investors ­ Fidelity and M&G ­ were so irritated by the idea that they might be selling at an undervalue that they stayed in. They now stand to be rewarded handsomely for their obstinance.

Other recent public to private transactions have made the big fund managers look equally stupid in taking the private equity shilling. Debenhams has now almost wholly repaid its private equity acquirers their capital, and although there are no plans for an immediate float, their shareholdings are now in for nothing. The returns will be fabulous.

The high levels of debt leverage used in private equity takeovers mean that sometimes they do go wrong. Yet the instances of this happening are comparatively rare. Some of the tricks of private equity are being learned by the publicly quoted arena. Most companies are under pressure to return capital to shareholders these days. Yet still the stock market seems incapable of the alchemy practised by the private equity houses. The lesson for more traditional investors must be that when private equity comes bearing gifts, you know you are about to get your pocket felt.

Disengaging from UK equity markets

The disengagement by Britain's major insurance companies and pension funds from equity markets continues apace. According to ONS figures released yesterday, total investment by pension funds, insurance companies and trusts more than halved in the first quarter of this year to £9.9bn, which in itself might seem worrying enough for those who concern themselves with Britain's exceptionally low savings rate. Yet the more interesting point is raised by the breakdown.

This shows that while investment in government bonds is growing, investment in UK company securities dropped £4.3bn, continuing a trend which has been apparent for some years now. Insurance companies and pension funds are progressively reweighting their portfolios away from equities and towards bonds. A combination of much fiercer solvency requirements and maturing final-salary pension schemes is forcing institutional investment out of "high risk" equities and into "low risk" bonds.

Yet the UK stock market is quite sharply up so far this year, so who's buying? It's certainly not the private investor. The support comes rather from overseas, hedge funds and private equity. Britain PLC is increasingly owned by foreigners.

In the 10 years to 2004, foreign ownership of the UK stock market rose from just 16 per cent to 33 per cent. All the signs are that this trend is gathering pace. Of course, these things work both ways, and part of the disinvestment by established British institutions from the UK stock market is to increase weightings in overseas equities. There's a two-way flow here. Yet the biggest asset switch has been into bonds.

The higher rates of return that are available from UK equities will progressively go to overseas investors. Insurance company policyholders and pension fund members will meanwhile have to make do with returns which are little better than cash. This can't have been what the regulators intended. Our safety first ways mean that the upside in UK equities is being surrendered to others. Hey ho.

j.warner@independent.co.uk

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