Carlton rules out Sky deal for ITV Digital despite £409m loss

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Carlton Communications yesterday revealed 400 job losses and appeared to rule out any deal with BSkyB to reduce losses at its ITV Digital joint venture.

It is understood that Granada, the other ITV Digital shareholder, is keen to sign a deal which hands over management of the venture's 1.2 million subscribers to its rival, Rupert Murdoch's Sky. David Chance, a former Sky deputy chief executive and now a Granada director, has been charged with forging this agreement. Cash-strapped Carlton and Granada want to reduce the future investment required in ITV Digital.

However, Carlton, reporting a sharp rise in losses, suggested a Sky tie-up was not feasible. Gerry Murphy, Carlton's chief executive, said: "For Sky to manage the subscribers would be problematic from a regulatory perspective."

Mr Murphy said Sky would continue to have a trading arrangement with ITV Digital, as the service carries Sky channels. He said a new relationship with Sky might emerge if it joined a planned industry promotion of digital television.

A so-called "digital coalition", led by ITV and the BBC, is seeking to agree terms to jointly promote free-to-air channels, as a way to entice consumers to take up digital TV. Sky's participation in this would be welcome, Mr Murphy said.

However, television executives pointed out that this would be a much shallower relationship with Sky than indicated by Granada and this seemed to point to a split between ITV's two main shareholders.

Paul Richards, an analyst at Numis, said: "It's very difficult to predict how the regulator would view a joint venture with Sky. In any case, it could get bogged down in an inquiry for a year."

ITV Digital hopes to dramatically reduce its subscriber acquisition costs by convincing customers to pay for a set-top box, which enables a conventional TV to receive a digital signal. The business currently provides a subsidy so the boxes are free to consumers.

"We are talking to other broadcasters to make sure there is a choice of digital platforms," Mr Murphy said. "It's high time all the free-to-air players put their muscle behind this [digital promotion scheme]."

Mr Murphy also dismissed speculation that ITV Digital would be closed altogether. "We hope to be much more creative than that," he said.

Carlton shares closed up 10p at 225p yesterday, after its operating performance on its core business came in ahead of City expectations. Before all exceptional items, the company reported a profit of £118.3m, for the year ended 30 September, down from £192.6m last year. Like-for-like advertising revenues were 13 per cent lower.

However, after digital investment costs there was a loss of £231.4m and a goodwill write down on the sale of Carlton's Technicolor business, which took the total bottom-line loss to £409.2m before tax.

In recent days, Carlton has moved to allay concerns over its balance sheet and it cashed in some of the deferred payment it received for the Technicolor disposal, by issuing convertible bonds. This has improved net debt from more than £500m to some £7m. The company said it now has cash of nearly £800m on tap. Mr Richards said Carlton's balance sheet now looked "comfortable".

Some 300 of the job losses during the last financial year came from digital operations, such as Carlton's Food Network, which were closed. This year a further 100 redundancies are expected.