Jeremy Warner's Outlook: NTL is only just out of debtors' prison. With problems aplenty, can it afford to bid for ITV?

ScottishPower: not yet a done deal; Time for a new approach on rates
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The Independent Online

Wrong channel, I know, but as Victor Meldrew would put it, "I simply don't believe it." The news that NTL wants to explore the possibility of a combination with ITV is the most incredulous merger proposal in quite a while - and boy have there been some bizarre ones during the course of the present bout of merger mania.

True enough, the two companies do have a lot in common. Both of them are in a management, structural and strategic mess. But this scarcely counts as a good enough reason to merge.

To the contrary, the NTL board already has quite enough on its plate trying to sort out cable's lamentable standards of customer service, stemming the outflow of subscribers, and trying to make head or tail of why on earth they bought Virgin Mobile. To add the task of turning around ITV, with plummeting advertising revenues and audiences, would surely be a challenge too far.

Takeover proposals come in all different shapes and sizes, but this one very definitely falls into the category of two drunks attempting to prop each other up. It is a truly desperate and silly idea, which I imagine will quite quickly be assigned to the waste bin when the two sides get round the table to talk. Yet NTL, I'm told, is deadly serious, and has even already got some of the finance lined up. Possibly misguided, I know, but City chit-chat that the concept must have come straight from the fevered imaginings of Sir Richard Branson, who post the sale of Virgin Mobile is NTL's biggest shareholder, seems all too plausible.

Already NTL is promising to rebrand itself Virgin Media. Snap up ITV and the Virgin name gains greater traction still. The possibilities are endless. Cameo roles for Sir Richard in Corrie. Top story in News at Ten, gong, Sir Richard takes flight in Virgin Galactic, gong, Sir Richard invests billions combating climate change, gong, Virgin invests in China. And finally, don't miss Prime Suspect, brought to you by Virgin Atlantic.

The "Four Play" boasted of by NTL, when it acquired Virgin Mobile, of broadband, mobile, landline telephony and pay TV all under one roof, suddenly becomes "Five Play", with free to air terrestrial TV tacked on as well. Indeed this is the only possible rationale for this extraordinary proposal I can think of - that with the growing success of the Freeview platform in multichannel TV, acquiring ITV provides some kind of a hedge against the damage that Freeview is doing to pay TV. ITV's strong production credentials and back catalogue might also provide a decent source of content for NTL as it extends its broadband and pay TV proposition.

Even so, these supposed revenue synergies are too intangible to add up to a credible reason for doing a merger. NTL gets a big back catalogue of content to shove down its subscribers' throats, but what's in it for ITV investors? If they can get a full cash exit at a decent premium, then they might be tempted. Yet despite its refinancing, NTL is still quite highly geared. Can NTL really be trusted to take on another £5.5bn of debt, given how recently it emerged from the debtors' prison?

Hope springs eternal when it comes to ITV, but it is impossible to see why anyone would want to come to the beleaguered broadcaster's rescue at a price worth having. Salvation must come from within the company itself. Even Stephen Carter, again the hot favourite to secure the chief executive's job at ITV, would struggle to justify combining with NTL, and he once ran the company.

ScottishPower: not yet a done deal

If you think of sangria, flamenco, Torremolinos and Don Quixote whenever Spain is mentioned, then you are hugely out of date. This one-time cheap holiday destination for the alcohol-swilling hordes is today a thriving modern economy with a per capita income not so very far adrift from our own.

Furthermore, it contains some truly world-class companies, many of which are better and more adventurously managed than our own. One of them is Banco Santander, which recently bought Abbey National. Another is Telefonica, which bought O2. A third is Ferrovial, which has just paid £11bn for BAA. And then there is Iberdrola, which wants to buy ScottishPower.

In Iberdrola's case, the motivation is said to be more defensive than anything else. Spain's energy sector is subject to a bewildering array of M & A activity right now. Gas Natural was meant to be merging with Endesa in a deal that would have seen up to €8bn of assets offloaded on to Iberdrola. Then in came E.ON of Germany with a separate bid for Endesa. In the meantime, two of Spain's biggest construction companies, flush with cash from the building boom of recent years, have separately taken stakes in both Iberdrola and Endesa, and in Iberdrola's case, may be about to bid.

The underlying picture is that Spain is Europe's fastest-growing energy market. This is partly a factor of economic growth, but it is also fed by surging demand for air-conditioning, as more and more Spaniards install this modern luxury.

Iberdrola, which specialises in renewable and hydro-electric power, has ridden these trends with masterly precision, and is widely thought a company of which Spain can be proud. It wouldn't do for it to be snapped up by foreign, or even domestic, predators. By bulking up, the company becomes less absorbable for others. On the other hand, Jose Ignacio Sanchéz Galán, the chief executive, is not about to embark on a value-destructive takeover simply for the purpose of himself becoming immune to takeovers.

The £8 a share plus Scottish Power is demanding would be quite a bite for Iberdrola, even applying oodles of leverage, bringing in private equity or infrastructure fund partners, and taking account of the sizeable tax breaks Spanish companies get when buying abroad - they are allowed to charge some of the goodwill costs against corporation tax. This is very far from being a done deal.

Time for a new approach on rates

Well, there's a surprise. There's rarely been an interest rate rise as well-predicted as this one. You don't need to be an economist to see why. Forget the rest of the Bank of England's press release explaining the decision yesterday. Only one sentence really counts. "Credit and broad money growth remain rapid, and asset prices have continued to rise."

What this means is that money is both plentiful and cheap. Price and wage deflation from the Far East and Eastern Europe has ensured that less of this explosion in easy money has gone into the price of goods and services as it perhaps would have done in the past. Instead it has gone into assets. Everything from house prices to commodities, fine wines, art, commercial property and shares have been rising strongly.

Technically speaking, the Bank of England doesn't have to worry about these things. Its brief is to target a rate of inflation - the CPI - which doesn't include asset prices, or even other strongly rising elements of the cost of living such as council tax.

Since average earnings are not yet rising fast enough to compensate, people have to borrow to buy these things. There is no shortage of providers. Abbey will now lend up to five times joint income on a mortgage, while Halifax is said to be about to launch a first time buyer-enticing deal of 125 per cent of the valuation. A quarter point is unlikely to make any difference one way or the other. People will simply borrow even more to make up the difference. Rates are therefore almost certain to rise higher still until eventually the pips really do begin to squeak.

All of this should have begun much sooner. The governor's decision to vote against the last time the MPC cut rates has been wholly vindicated. Yet the Bank is required to target only CPI price inflation. Calming asset price bubbles is no part of its remit, even though common sense alone tells you that strongly rising asset prices are very much a part of inflation.

Hardly a new point, but it is worth repeating. It's high time the Bank was given a broader independence in setting interest rates, which like the US Federal Reserve would require it to have regard for wider economic stability, rather than just a narrow, and for many, rather meaningless inflation target.

j.warner@independent.co.uk

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