United and MAI agree pounds 3bn defensive merger

Media battles: Market waits for Carlton to mount a pre-emptive bid as the struggle to emulate Rupert Murdoch's empire gets into gear
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MAI, Lord Hollick's media and financial services conglomerate, yesterday agreed a pounds 3bn defensive merger with United News & Media, Lord Stevens' newspaper and exhibitions company, in the first link between newspapers and TV companies since the Government proposed liberalisation of the rules last November.

But industry sources said the bidding was far from over, with the market expecting a pre-emptive bid from Michael Green's Carlton Communications, which is believed to be interested in MAI's two ITV franchises, Anglia and Meridian.

The speculation helped drive MAI's share price 59p higher to 448p, despite the proposed merger with United. "Clearly, the market is expecting Green to move," said one media analyst. "He doesn't like to lose."

There was confusion yesterday over whether Carlton would be allowed to own the additional licences, under competition rules. But the market shrugged off the concern in hectic trading, convinced that more bid action would follow.

The media sector has been extremely active since the Government confirmed in last year's Queen's Speech that it would allow cross-ownership between newspaper publishers and television companies for the first time.

The proposed rules have helped push up shares in several ITV companies - including Yorkshire-Tyne Tees, in which MAI has a 15 per cent stake. Yesterday's proposed merger would give the new combine greater financial strength, and the ability to bid more easily for television assets.

Lord Hollick would not rule out a bid for YTT in the future. "Of course we will be looking at all our options," he said. "We might have to sell part of our interests in the Yorkshire regional newspaper market in order to comply with legislation."

Following a merger, United and MAI would control the two MAI ITV licences, a stake in Channel 5, a stable of regional newspapers including the Yorkshire Post and the Express Newspaper group, which includes the Daily Express, the Sunday Express and the Star.

Analysts questioned the commercial logic of the merger, suggesting that the move was defensive. "Hollick didn't want to have anything to do with Green," said one media analyst. For his part, Lord Stevens has been looking for some months at ways of improving the profitability of the Express newspapers, and is believed to have entertained at least two merger proposals.

The two companies said yesterday the merger would produce a "major British- based media group," and said they intend to expand domestically and internationally.

Under the agreed deal, which has been the topic of secret discussions since early September, United will make an offer for MAI on the basis of 54 new United shares for every 100 MAI shares. Upon completion, the new company, which has yet to be named, will be owned 50.7 per cent by United shareholders and 49.3 per cent by MAI shareholders.

The two companies would have had pro-forma revenues of pounds 1.9bn last year, and pre-tax profits of pounds 214m. MAI also announced full-year profits of pounds 62.7m, up 7 per cent.

Lord Stevens would be chairman of the merged companies, while Lord Hollick would become chief executive. They said yesterday that the dividend policy would be agressive, and that dividend cover would be a low 1.6 times. "We intend to improve that," Lord Hollick said, "through cost savings and generating higher profits."

The joint company would seek to save 10 per cent of operating costs, or nearly pounds 150m, following reductions in overheads and centralised purchasing.

Both men said they would roll over their service contracts and stock options into the new company. In addition, they have reached an agreement on management control giving Lord Stevens influence over the Express Newspapers' "political stance", which is to remain Conservative, despite Lord Hollick's well-known Labour views.

The merger makes use of a controversial "warehousing" scheme first developed by the publishing company Emap to avoid cross-ownership restrictions. Control of Express Newspapers will be placed in two "deadlocked" companies over which the merged companies would have no voting control. This would be unwound once the Broadcasting Bill is passed, probably by the summer.

"There is of course a risk that the Bill does not pass," Lord Hollick conceded yesterday. "But we feel confident that this merger is of the kind anticipated by the Government."

The Independent Television Commission has given its written approval of the warehousing scheme, but is known to be criticial of such approaches.