ITV blockbuster: it's a merger, get me out of here

Granada's marriage with Carlton may not have the blessing of advertisers and regulators, write Heather Tomlinson and Jason Nissé

To describe as "news" Friday's announcement that ITV shareholders Carlton and Granada are to merge might be stretching the word's meaning. After all, they nearly merged earlier this year and Gerry Murphy, Carlton's chief executive, admits they "never stopped talking".

But if news it was, then the news evoked mixed feelings. Joy for the long-suffering investors in both companies, who have seen ITV's audience plummet and profits go in the same direction.

But dread for the advertisers that peddle their wares in the commercial breaks, as the combination of ITV into a complete whole would give it too much power over how much it charges for commercial slots.

The fear could be premature. The merger of the two companies has been mooted for two years. But it could be a further two years before the deal is done – if it is done at all.

The companies have many problems at present. Mr Murphy is expected to leave Carlton shortly, possibly for retailer Kingfisher. Asked if this deal was his swan-song, the charming Irishman smiled: "To be called a swan is better than a lame duck," he said, before hinting that he would resign in weeks if the merger was on track. The structure of the group, with Carlton founder Michael Green as chairman and Granada's Charles Allan as chief executive, appears to leave Mr Murphy sidelined.

ITV is also having problems filling the slot of head of programming. "We regard ITV as so dysfunctional that a merger of Carlton and Granada would be operation-ally excellent," said research from stockbroker Merrill Lynch. Mr Murphy argues that appointing a boss of ITV and sorting out its ownership structure is a "chicken-and-egg situation, and the chicken is clarifying the future shape of ITV".

But there are hurdles to overcome. First, under current law, the merger would be illegal. The ownership of ITV is split up into regions around the country, of which Carlton and Granada own 90 per cent. The rest is owned by media company SMG and Ulster TV – both expected to be bid targets following the merger.

No one can own the two licences for London. No one company can own more than 15 per cent of the total audience share – but ITV has 23 per cent.

The draft version of the Communications Bill said these rules could be scrapped, although the Government hasn't published the final version yet. Assuming that the Bill still contains the relevant changes in law, it has to make the tortuous journey through Parliament, and MPs and lords will have a lot to say.

"From a political point of view, this is not a particularly politic thing to do," said Jamie Cowling, a media policy researcher at Government-friendly think-tank, the Institute of Public Policy Research. "We don't know for certain if the proposals to create a single ITV company will be in the Queen's Speech. It's a bit rich, isn't it? From a political point of view it would have been better to wait a couple of weeks for the publication of the Bill before presenting the merger proposals formally."

The Enterprise Bill still being piloted through Parliament will also have a bearing when it comes into force early next year. It proposes changes in the competition rules, and how they are enforced.

Under any version of competition law the merger's prospects are questionable. It is likely to be investigated by the Competition Commission. With Carlton and Granada receiving almost half of the total UK TV ad revenue, advertisers are likely to lobby the commission to impose tough rules on a combined ITV.

"Our primary concern is the monopoly position that it creates in TV advertising sales in the UK," said Gary Cunningham, the director of external relations at Procter & Gamble, the largest TV advertiser in the UK.

"ITV is critical to reach large audiences quickly. It gives them a strong grip on the market. It is not just about the advertiser, it is about the public. The costs of advertising are reflected in the cost of goods."

The two ITV companies will give details of how they will address the issues next week. It is expected they will spin off an independent sales house to sell up to half ITV's airtime. And they will probably "park" some of the ITV franchises in a special-purpose vehicle created by the duo's advisers, Lazards and UBS Warburg.

Spinning off the sales hou-ses was recommended in the Institute of Practitioners in Advertising submission to the Government on the Competition Bill. Mark Jarvis, head of broadcasting at media buying firm Carat, sees this as unnecessary. "That's a nonsense. I can't see that you can have one company without knowing what two sales companies are doing. I would rather there was just one."

But for those who want the sales teams to be split, there are still concerns. "We would want two wholly independent sales operators," said Jim Marshall, chief executive of media-buying firm Media-vest. "I think if the rules are clearly set up and rigorously policed, it can be made to work. But there is always going to be an underlying suspicion and discomfort with it."

Advertisers have not yet had any formal talks with Carlton or Granada on how to alleviate their concerns. The number of issues remaining on the deal begs the question as to why the companies have announced it now.

"We estimate that Carlton would have had to cut its dividend if it stayed independent," said Neil Blackley, a respected media analyst at investment bank Merrill Lynch. "Together with the departure of Gerry Murphy ... I believe they decided to agree more equitable terms. Except for that, I guess that they would have waited for the Queen's Speech, in the absence of any other bidder."

There is concern in the industry that financial necessity is overriding their obligations as a public broadcaster. Mr Cunningham at Procter & Gamble said: "It seems to be driven by profit problems rather than in customers' or viewers' interests."

So you might call the merger announcement news – but is it news that's fit to print?