TV blowing bubbles

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The Independent Online
As if tuning in to GMTV by mistake wasn't a bad enough way to start yesterday morning, the man from the Takeover Panel was on the phone almost as soon as I arrived at the office.

His was a plaintive inquiry as to whether Gerry Robinson, Granada's chief executive, had indeed said what I had reported him as saying on Tuesday about LWT's poor investment record, since it had upset the London broadcaster, which had duly complained. All in all, one could scarcely look for a better illustration of how farcical the business of policing takeovers has become.

LWT is subject to a hostile bid from Granada, and it had taken umbrage at Mr Robinson's observation that it was understandable another conglomerate, MAI, had offered a higher price for a rival broadcaster, Anglia, than Granada had for LWT.

He (rather reasonably) attributed this to the fact that Anglia had some decent assets behind it while, with the exception of its share in ITN, LWT's investments were loss-making.

No one could dispute the essential truth of that argument. LWT's most high-profile investments have been a strategic 20 per cent in Yorkshire-Tyne Tees (which looks to have lost more than pounds 9m in 1993) plus 20 per cent in the depressingly acronymic GMTV. That damaged the LWT profit- and-loss account to the tune of pounds 2.2m last year.

Anglia, in contrast, has such diverse and saleable investments as a stake in a very profitable Australian film company and an increasingly lucrative holding in BSkyB. Plus a lot of cash.

LWT's complaint, however, stemmed from the fact that it does have a couple of other investments aside from ITN - a stake in London News Network and a joint venture with Granada, which together contributed pounds 1.1m to LWT profits last year. Pretty small beer and also rather illusory - since the investments could scarcely be realised - but enough to engender much huffing and puffing.

The irony is that squabbles like these throw little if any light on the real issues in such bids. Few things are as questionable as the valuations underlying the current prices of ITV companies. The focus has been myopic, with a heavy concentration on the short-term earnings power of target companies.

All concerned seem to have forgotten that each ITV franchise will come up for renewal in 2002. Existing ITV companies will have a preferential right to continue to hold their franchise for a further 10 years. But not on the same terms; they will be offered their extension on market terms.

Companies that got their franchises on the cheap this time round will find the next deal is less to their liking. That assumes, of course, that their current profits survive the impending onslaught from cable, satellite, Channel 5 and so on.

Given that, how much more are people now prepared to pay for TV companies than can be justified by expectations for earnings by 2002?

Anthony de Larrinaga, of the brokers Panmure Gordon, reckons LWT's earnings stream to 2002 is worth about pounds 3.40, half Granada's offer price. In other words, half the value of the company - pounds 350m - is tied up in its residual value come 2002. Yet for Yorkshire-Tyne Tees, which should have similar levels of ad revenue, the equivalent figure is only pounds 50m.

Of course the managements of TV companies wax lyrical about their other potentially valuable assets, such as programme libraries. One could argue endlessly about just how much international demand there is for Blind Date or Emmerdale Farm, or the lifespan of such programmes.

Nevertheless, without a secondary market, their value will be limited. Unfortunately, the creation of a profitable secondary market implies a proliferation of competition from cable, satellite, Channel 5 et al - none of which augurs well for ITV revenues.

It is hard to avoid the conclusion that a speculative bubble, driven by an obsession with cheap money and short-term earnings potential at the expense of longer- term value, has arisen around ITV companies. Hard, too, not to suspect that a fashion for the forthcoming 'media revolution' has had a lot to do with all this.

It is all rather reminiscent of the asset bubbles of the 1980s. The trouble with delusions is that they can provide lucrative short-term profits for the quick-footed. The trick is never to believe that the Emperor is wearing anything other than his birthday suit.

Hamish McRae returns next week.

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