ITV Digital collapse boosts Carlton and Granada shares

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The City yesterday welcomed the decision to put the heavily loss-making ITV Digital into administration, a move that could save its shareholders £300m.

Shares in the venture's joint owners, Carlton and Granada, jumped higher on the possibility that they will have to invest no more in ITV Digital. BSkyB, which runs the rival satellite service, also gained on the stock market ­ as it looked like a major rival was about to go under.

Kingsley Wilson, an analyst at Investec Henderson Crosthwaite, said: "For the first time in three years, we can stop worrying about the black hole that is ITV Digital."

ITV sources pointed out that the digital service could simply have been closed but it was put into the limbo status of "administration" as a last, high-risk, tactic to try and force suppliers to charge less, otherwise they might get nothing. The key deal that has to be renegotiated is the £315m football rights contract signed in 2000 ­ of which £180m is still outstanding.

All other commercial agreements, such as the supply of BSkyB content, will now be subject to renegotiation by the administrators, Deloitte & Touche. There is a deadline of 15 April to come up with a restructuring package. If successful, Carlton and Granada, who pledged to continue short-term financing, could then take the ITV Digital back out of administration. Otherwise, the next step is to put ITV Digital into liquidation.

If it is saved, the plan is to run the business in future as a "light" service with fewer, cheaper channels on offer. Carlton and Granada have already sunk £800m into ITV Digital, which was launched as ONdigital at the end of 1998. The original business plan envisaged expenditure of £300m to break even. Now it is said that a total of £1.1bn is needed to see ITV Digital through to profit, sometime in 2004.

ITV Digital was undone by having to copy Sky's expensive strategy of giving away set-top boxes to consumers and competing with Sky for football rights. Critics complained that it did not differentiate itself from Sky by price or content. With a collapse in advertising revenues, Carlton and Granada simply could not continue to fund the venture on its current business plan.

The losses and ongoing investment commitment of ITV Digital has been seen as a major deterrent to an outside bid for Carlton or Granada. Also, ITV Digital was seen as an obstacle to a merger of Carlton and Granada. With the ITV Digital problem potentially solved, a European predator could now step in or Carlton and Granada rekindle merger talks.