The price is not right for ITV

INVESTMENT COLUMN

In the mad world of television, there is, it seems, no such thing as excess. Judging by the astronomical prices that ITV companies are fetching, there seems to be little logical connection between fundamental performance and stock market ratings. Yorkshire-Tyne Tees, the widely tipped takeover candidate, is trading at a mind-boggling 60 times historic earnings, while HTV, the licence holder for Wales and the West, is on 40 times. Even tiny Ulster TV manages a price/earnings ratio of 25.

There was a time last year when the whole ITV sector looked relatively cheap. Expectations of a consolidation, following changes in cross-media ownership rules, had not yet found their way into prices, while the prospect of a renegotiation of the high licence payments made to the Treasury was judged by short-termists as being too far off.

Since then, both issues have been taken on board by the market. Indeed, with Yorkshire Tyne-Tees trading at above pounds 10 a share, investors - and any potential bidder - have to be absolutely convinced that the pounds 55m licence payment will come down considerably.

Renegotiated licences are only part of the story. The ITV sector is also going to see the money it gets from Channel 4 under the infamous "safety net" funding formula decline, now that the Government has been convinced the current system is unfair to Channel 4. Analysts expect lower licence fees will more than offset losses from the levy but there is still some doubt on this.

Longer term, the advertising revenues earned by Channel 3 companies are bound to be affected by the arrival of Channel 5. Later still, the introduction of digital terrestrial television will further fragment the market.

In coming weeks, it is takeover speculation that will drive the sector. YTT shares are unlikely to retreat much unless Granada, the likely bidder, decides to back away. HTV will remain in the frame for as long as Carlton's Michael Green keeps his options open. Scottish will benefit from Mirror Group's unquestioned interest.

But with such froth in the market, it is difficult to focus on the underlying performance. HTV looks like an earnings winner, as one of the few ITV companies to successfully market its programming to the cable and satellite industry. Likewise, Scottish is viewed as being well managed, and has lagged other ITV shares in the recent spate of speculative buying.

Of the bigger companies, YTT cannot go much higher. Carlton and Granada are far more likely predators than bid candidates, and investors will have to judge whether paying over-the-odds for other ITV companies can be warranted at these prices.

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