Pull plug on Carlton and Granada
Friday 02 May 2003
The bounce back by shares in Carlton Communications and Granada, the ITV companies, might be over. This week, the Competition Commission said it may allow the deal only if both companies' sales houses are made independent.
There is no final decision, but the watchdog's "issues letter" made for grim reading. Together, Carlton and Granada would have more than 50 per cent of the television advertising market – which is a formidable regulatory obstacle.
Merging everything but the sales houses would provide annual savings of £35m, while the sales houses would add another £20m, according to the companies. The market thought that separating one sales house would be the price for getting the merger through, so it was a shock that the merged company may have to be so savagely dismembered. With both sales houses gone, it may not be worth doing the merger.
Competition lawyers have warned all along about the difficulty of getting the transaction cleared, yet most analysts still seem to put the chance of getting it through in a viable form at about 80 per cent. This might be a serious miscalculation. While Granada and Carlton shares have lost ground in recent days, the City is still not pricing in the negative scenario strongly enough.
Granada shares fell 1.5p yesterday at 66.75p (virtually the same as when merger talks leaked), while Carlton fell 4.5p at 100.5p (compared to 113p).
The problem is particularly acute for Carlton investors. As the smaller company, with a relatively small production arm, relatively high debt, and no-where else to go strategically, Carlton shares are likely to be very worth much less than today's price as a stand-alone company – maybe less than half of today's level.
Granada has a sizeable production house, so programme-making provides it with another income stream. Carlton is dependent on ITV advertising revenues, which have been growing this year but only weakly. May is forecast to be a down month, for ITV while June could be 17 per cent lower than last year (which gained from the World Cup).
A single ITV offers a lot of upside and would be an attractive takeover target for a US company. However, with advertising still uncertain and the regulatory risk significant, both shares are unattractive for now.
Even bid interest cannot lift Vernalis
The cash crisis Vernalis pretended wasn't looming finally overtook the biotech company in March, when it admitted shareholders would have to cough up to keep it going. Yesterday, the big shareholders coughed.
Vernalis has wrapped up a £14m fundraising it hopes will tie it over until a £10m bonus arrives from Elan, which is marketing its one launched drug, a migraine pill called Frova. The fundraising involves doubling the number of Vernalis shares in issue, and shareholders can take part in a seven-for-10 share offer if they don't want to see their stake diluted.
It's not worth doing that, since Vernalis will still lead a hand-to-mouth existence. It hopes royalties from Frova will cover research and development of other drugs (it has a potential treatment for impotence among people taking anti-depressants), but the company is sub-scale. With biotech drugs more likely to fail their trials than pass them, a company with this meagre a pipeline is unattractive in the extreme.
Frova is a nice little earner, but no blockbuster. The best hope lies in a takeover and Vernalis has attracted the interest of some sectormates. But that might be an all-paper deal and, after an 8.5p rise to 48.5p by Vernalis shares yesterday, there is not much to go for here.
Best to steer around Cattles
Some recent pronouncements from the UK's big door-to-door moneylenders, the likes of Provident Financial and Cattles, suggest that there is little growth left in this market, partly because of the benign economic conditions of recent years and partly because of lifestyle changes that mean more people are out to work more of the time.
The challenge, then, is to find new sources of business, and Cattles recently set out an ambitious five-year growth plan that included expanding its Welcome business providing personal loans, hire purchase finance and secured loans. Through the acquisition of Dial4aLoan it is also capitalising on the current fashion for mortgage equity withdrawal. A trading update yesterday again soothed market fears that the slowdown in the UK economy might saddle Cattles with high bad debts and make it tougher for it to find new business.
Barrie Cottingham, the chairman, said: "The group's trading to date in 2003, including credit quality and gearing, are all in line with our expectations." The question is whether it is realistic to assume this will continue, and investors would be wise to take a sceptical stance.
Cattles does have a good record and has flushed out many of its riskiest customers in recent times. But it is a high-cost business that could suffer severely if there is a downturn. The fear (expressed by Arbuthnot Securities yesterday, when that broker turned bearish on Cattles shares) is that Cattles' has moved away from door-to-door lending to those who absolutely need to take on a bit of credit for one-off purchases. Increasingly, it has found itself financing the luxuries of just the sort of people who have a bit of slack in their belts that they can tighten. The shares do not look cheap and should be avoided.
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