Granada appeared to have triumphed over a weakened Carlton in the merger deal announced yesterday, which will see it pay no premium for taking over its ITV rival.
In a deal welcomed by the City, Granada shareholders will receive 68 per cent of the combined company plus £200m in cash, worth 7p a share. Gerry Murphy, Carlton's chief executive who will not have a job at the merged company, is now in line for a pay-off of at least £1m, despite having another job to go to – he is favourite to emerge as the new chief executive of Kingfisher.
The merger will bring together all but four of the 15 ITV franchises and would give the combined entity 54 per cent of UK television advertising. To try to get the deal past the competition authorities, one of the companies' ad sales houses will be separated and put under an independent management, possibly with private-equity backing. The two sales operations would then sell airtime for different franchise areas.
Advertisers insisted the separation of sales houses must be credible. However, Channel 4 said it did not believe the sales operations would be effectively separated. Analysts at Merrill Lynch rated the probability of the transaction getting through at 70 per cent, if one sales house is made independent.
Carlton shares closed up 14 per cent at 128.5p, while Granada gained 9 per cent to 72.5p. The structure of the deal in effect gives Granada a share of the merged business that is in line with the relative stock market valuations of the two groups. It is thought that previous merger talks broke down in February because Michael Green, Carlton's chairman, was holding out for a premium.
However, Carlton's bargaining position has weakened as its share price has come off as a result of worries over its dividend and the increasing realisation that a third party is not going to come in with an offer. Carlton shareholders can increase their share of the combined business to 34 per cent in 2006, dependent on the performance of the combined business. Kingsley Wilson, an analyst at Investec Securities, said: "We believe that Granada has gained the upper hand under the proposed structure as Green increasingly came under pressure to do the deal."
Charles Allen, Granada's chairman, said the break-through in talks came on Thursday, when the cash element and the potential upside for Carlton shareholders was agreed. "A simple deal didn't work [in February]. We had a genuine breakthrough in these two areas," said Mr Allen, who will be chief executive of the combined company.
The companies had planned to hold off on announcing the deal for at least a week, but a report in yesterday's Independent forced a brief statement to be rushed out. It is thought that some of the ground-work for the deal was laid at a Schroder Salomon Smith Barney media conference in Barcelona, that was attended in mid-September by both Mr Allen and Mr Green, who will be chairman of the merged company.
Carlton's negotiating position was further undermined by the imminent departure of Mr Murphy, who was highly regarded and is entitled to at least two years' pay now.
Neil Blackley, an analyst at Merrill Lynch, said: "The lack of inclusion of Gerry Murphy in the line up is a negative, and with no head of ITV Network Centre, there are management question marks on the merger."
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