ITV giants Granada and Carlton reopen merger negotiations

Carlton and Granada have reopened merger talks in a move that will bring together Britain's two largest ITV broadcasters.

Carlton shares rose 9 per cent yesterday amid speculation that a deal could be announced soon, possibly within days. There was also heavy volume in Granada shares.

One person close to the negotiations said: "They are talking again. The whole structure of the merger was signed off in February (when the previous talks failed) and the structure would be the same again."

Carlton and Granada believe they could satisfy the regulators with a deal. It is understood that the two companies made a combined £300m bid for the television interests of SMG last month. This shows that the two groups are confident they can find a way of getting around regulatory obstacles.

But the Scottish media group threw out the deal as it was looking for £350m and knew a good price would not be achieved if the two most likely bidders were working together. SMG decided to auction its Herald newspapers division instead.

In February the original Carlton-Granada merger failed when news of the talks leaked and because they could not agree on the relative valuations of the two groups.

But Carlton shares have fallen sharply in recent weeks on fears of a dividend cut, a gloomy outlook for advertising sales and receding expectations of a takeover. The current negotiations also hinge on the value attributed to Carlton.

One of the triggers for the Carlton-Granada tie-up being back on the agenda is the expected departure of Carlton's chief executive, Gerry Murphy, to the chief executive position at the Kingfisher retail group. This would severely weaken Carlton's position.

Mr Murphy has voiced concerns over the deal on the grounds that regulators could block a merger that could give the combined company 50 per cent of television advertising. Though he is broadly in favour of a tie-up he believes the two should proceed more slowly.

But Charles Allen, the chairman of Granada, felt it would be possible to satisfy the regulators if the two companies kept their advertising functions separate. One possibility would be to separate one of the two sales houses, probably through a demerger. It would then compete for ad sales for the ITV network with the internal sales operation.

Sir George Russell, the former TV regulator, was recently brought on to the Granada board as deputy chairman to help the company fashion a transaction that could be cleared by the competition authorities,

Any deal would be conditional on the government's draft Communications Bill becoming law next year. This scrapped the rules barring one company from controlling 15 per cent or more of the national audience or owning both London franchises.

A merger of Carlton and Granada would create a company with a combined market value of £2.5bn on yesterday's closing prices.

The merger, which would, in effect, be an all-share takeover of Carlton, has been viewed as increasingly inevitable as the performance of the two major ITV companies worsens. The failure of the ITV Digital platform cost the two companies £1bn between them, advertising revenue has collapsed while ITV has seen a sharp drop in television audiences.

More recently ITV failed to lure Dawn Airey from Channel 5 as its chief executive when she decided to join BSkyB as managing director of Sky Networks. This convinced the management of Carlton and Granada that the current structure could not continue.

With Mr Murphy expected to be appointed as Kingfisher's new chief executive by the end of this month, the merged Carlton and Granada would face City pressure to beef up its management. One City source said: "People would not want Charles Allen to run the whole show."

Carlton shares closed 9p higher at 113p. Granada was up 1.25 at 66.5p. Both companies declined to comment.