Outlook: Valuation differences fall away as urgency enters ITV talks

J Sainsbury/Asda: It's not meltdown after all

The consolidation of ITV from an original 15 companies into just one is drawing inexorably towards its final denouement. As ever in these situations, it was financial and operational crises that in the end allowed Carlton and Granada to settle their differences on valuation and agree terms.

Plunging advertising revenues and the disaster of ITV Digital are one thing. Worse still, ITV was earlier this year overtaken by the BBC in audience share, while during the summer, the schedules seemed to plumb new depths of awfulness, causing ITV to suffer the worst viewing figures in its history. If it wasn't for I'm a Celebrity, Get Me Out of Here, hardly one of British TV's greatest creative triumphs but a crowd puller none the less, viewers might have switched off entirely.

ITV's failure to secure the services of Dawn Airey, chief executive of Channel 5, must have been the final straw. To be rejected in favour of Sky, if only because Ms Airey hadn't a clue whom she was meant to be working for at ITV, was a deeply humiliating event, which must have concentrated minds powerfully.

Something plainly had to be done and at a recent conference in Barcelona, Charles Allen and Michael Green, chairman of Granada and Carlton respectively, finally bonded. OK, so in so far as two such different characters are ever likely to, they bonded. The valuation gap has been closed by agreeing £200m cash back for Granada shareholders, in recognition of Granada's superior balance sheet, and an extra 2 per cent of the combined equity for Carlton shareholders, dependent on targets being met, to recognise Carlton's greater exposure to any upturn in the advertising market.

The big barrier to this deal remains regulatory, as it has always been. ITV seems to have been trying its damnedest to lose market share in recent years, but Granada and Carlton combined would still have more than 50 per cent of all TV advertising in the UK, a market share which in normal circumstances wouldn't stand a snowball's chance in Hades of getting through the Competition Commission. Granada plans to deal with this problem by hiving off one of the two sales houses into a separately owned vehicle which would then sell airtime for franchises representing approximately half the network.

Some will see this as a largely cosmetic device, but having spoken to a number of big advertising groups yesterday, I could find very little opposition to what's being proposed. Advertisers have never been opposed to the idea of a single ITV programmer. Rather the reverse, in fact. If it made ITV a more formidable channel with more viewers, advertisers would welcome such a development. But they wouldn't accept a single point of sale for advertising as long as ITV continues to command such a high share of the total market. No one will say for certain until they've seen the detail, but Granada's idea might just work.

There's a bigger reason why the Competition Commission will, in all likelihood, eventually say yes. ITV is fast going down the pan. If regulators were to wait until its share of the advertising market had shrunk to a more tolerable level of, say, 30 per cent, it might by then already be too late. As it is, ITV struggles to compete with the licence fee funded BBC1 for spending on content. There is only so much shrinkage ITV can take in the programming budget before it ceases to become a viable alternative to the BBC.

So what, many will think. ITV only has itself to blame for its decline and fall. Let the market decide its fate. Well, it's not a bad line of argument and certainly there is very little sympathy for ITV in Government after the disaster of ITV Digital. Some ministers and officials view ITV with almost open contempt, a view Number 10 did its best to make public by removing ITV's traditional protection from foreign takeovers in the Communications Bill.

None the less, an enfeebled ITV is not what advertisers really want to see. There is only so much big advertisers can do through the medium of niche players. To allow the advertising market to fragment into a larger number of free to air and pay TV channels wouldn't necessarily be in their interests. Advertisers still want channels capable of delivering a mass market audience running to millions of viewers at any one time.

The cost benefits to be gained by removing duplicated infrastructures aren't huge – perhaps £30m to £35m. A single sales house would strip another £20m out of the cost base, but that's not an option for the time being. However, the real benefit is the more intangible one of creating for the first time in ITV's history a single decision centre and chain of command.

Michael Green is right when he says that in a rapidly changing broadcasting industry, the two companies need to combine to compete effectively. "Delay is not in the interests of viewers, advertisers, stakeholders or the future of British broadcasting." Whether he and Mr Allen are the right combination to lead ITV into its bright new future, having made such a hash of things so far, is another question. But for the time being, it is also a question for another day. First the deal needs to be done.

J Sainsbury/Asda

So that's a relief. It's not meltdown at Sainsbury's after all. After weeks of speculation that sales were collapsing and/or that that the company was about to cut the dividend, Sainsbury's was yesterday stung into releasing a trading statement which showed that although like-for-like sales growth is slowing, at least it is still happening. No comment was passed on the dividend, but Sir Peter Davis, the chief executive, can be pretty sure he'll be out on his ear if he dares to interfere with the Sainsbury family's annual income. If Sir Peter was going to cut the dividend, he should have done it at the start of his reign two and a bit years ago. To do it half-way through the turnaround strategy would smack of failure.

Even so, Sainsbury's will need to pull something pretty special out of the hat to prevent a resurgent Asda from taking over the number two slot in the British groceries market this Christmas. Since it was taken over by Wal-Mart a few years back, Asda has started calling all the shots in the UK grocery market, and in much else besides, since Asda is a major retailer of clothing as well. Wal-Mart's buying power has been used to dramatic effect across the range of produce, and prices have been driven down at a rate other retailers find hard to keep up with.

Slowly but surely, Wal-Mart is delivering on its promise to deliver US-style prices to British shores. The result is that its sales are growing a great deal faster even than the market leader, Tesco. Might it one day overtake Tesco too? There's quite a gap, which is why the strategists at Wal-Mart think another takeover a better way of delivering than through organic growth.

The general assumption among supermarket bosses is that the competition authorities would never allow a further big consolidation. Unwise to bet on it though. Wal-Mart has already succeeded in driving down prices in a way that has astonished rivals and suppliers in equal measure. Its pitch to the regulators would be that every day low prices might be rolled out on a much bigger scale if it were allowed to buy Safeways.

Sainsbury's is as sceptical as the next man that such a takeover would pass muster, but it might have something to gain from the combination. Sainsbury's would be the obvious buyer for at least some of the outlets Wal-Mart would have to sell off to address excessive local concentrations of stores. What's more, Sainsbury's has cleverly managed to hang on to its faintly up market image, the place as competitors used to quip "where good food costs more". That might be an advantage, giving Sainsbury's clear differentiation in a market place where the two titans of Tesco and Wal-Mart attempt to hammer each other into the ground on price.

jeremy.warner@independent.co.uk