Goldman Sachs' plan to take control of ITV would involve refinancing fees of £200m and the reduction of the broadcaster's programming budget by 25 per cent.
The proposal that emerged this week, from Goldman and the private-equity groups Apax and Blackstone, would see some £250m ripped out of the £1bn annual programming budget for the ITV family of channels. That would mean more repeats and more bought-in American programmes such as Friends and The West Wing, currently the preserve of Channel Four and Five.
ITV has often trumpeted its investment in making original, "quality" drama, but viewing figures for its main ITV1 channel are in sharp decline. It is understood the bidders, who want a 48 per cent stake in ITV, will commit to investing only for a year.
The plan involves the Goldman consortium injecting £1.3bn in equity and returning 86p a share to existing shareholders, who end up with 52 per cent of the company, which would remain listed. The debt markets would be tapped for some £3.3bn and they would axe ITV's chief executive Charles Allen and most of the top management. The BBC's former director-general, Greg Dyke, would run the new company.
Mr Allen has arranged urgent meetings with ITV shareholders next week to discuss the approach, which the company has rejected. It is thought ITV will offer to increase the size of its recently announced £300m share buy-back, in light of the £3.6bn the bidders are offering to pay the shareholders.
Investec Securities estimated ITV could afford to take the return to £950m by doubling its current conservative net debt-to-earnings ratio. The Goldman plan would see ITV debt soar to £3.5bn, putting it on a highly leveraged position of having debt equal to seven times its earnings, before interest, tax, depreciation and amortisation (Ebitda).
Marc Sugarman, an analyst at Citigroup, said in a research note: "ITV could replicate exactly the same leverage and multiples by distributing a 50p special dividend to existing shareholders. There would be no VC [venture capital] involvement, so shareholders would not be diluted at all."
Some shareholders may baulk at the level of refinancing fees involved in the proposal. In the bidders' business plan, £200m is set aside for the costs of arranging £3.2bn in debt. Although Goldman is not guaranteed to scoop up these fees - it is the bank's private-equity arm, not the main investment bank, that is involved in the approach - it is a very aggressive lender and could well win this business. The bidders and ITV declined to comment. ITV shares closed down 2p at 126p.
The Goldman consortium believes ITV spends more on content than its European peers and that it increases programming expenditure each year, but the payback, in terms of audience, decreases every year - making it an inefficient use of money.
Last year, the main ITV1 channel saw its share of the audience for commercial television drop 3.2 percentage points. However, this was mitigated in part by a 2.3 percentage point gain at the company's newer digital channels ITV2, ITV3, and the recently launched ITV4.
One television industry source said: "Cutting the programming budget might well work in the short term but ITV believes that in the long term it will be detrimental for the ITV brand and audiences. But by then, Goldman, Apax and Blackstone would have got out."
It is understood the Goldman team is also making assumptions about the future market for advertising - ITV's main source of revenue - that are far more optimistic than the company management's. And the bidders believe they can tackle ITV's pension fund situation by simply paying off the deficit of £300m. But the trustees of the pension scheme may want a much bigger injection of funds to make up for the much riskier company that will emerge from the deal.
The Goldman consortium has indicated it would explore adding pay-TV services to ITV's free-to-air business model. Analysts suggested they may sell off ITV's large production business, which would fetch about £1.2bn.
The bidders feel they are offering a deal structure that institutional shareholders are, in general, clamouring for - some cash up front with a share in the continuing upside. At least two institutions - Fidelity, ITV's biggest shareholder, and SVG Capital - support the approach. The Goldman consortium believes many shareholders are unhappy with ITV, which has lost out in the London stock market rally over the past two years, but a full-blown cash offer for the company could not work financially for a private-equity bidder.
One City source said: "It's a question of whether shareholders are happy with the status quo, in which case this approach will fail, or do they want something different." The deal is so complex there is not much room for the bidders to alter the proposition.Reuse content