Watchdogs at odds over ITV ruling

Competition Commission clears merger with only behavioural remedies but OFT queries decision

The clearance of the merger of Carlton and Granada on lenient terms yesterday came despite a dissenting opinion at the Competition Commission and apparent disquiet at the Office of Fair Trading.

The Department of Trade and Industry, following the advice of the Competition Commission, delivered the dream outcome for Carlton and Granada, paving the way for the creation of a single ITV.

Against expectation in legal circles, the deal has been cleared with behavioural remedies, while lawyers had anticipated the more draconian structural remedies to be imposed.

Advertisers had lobbied hard against a behavioural solution, as had ITV rivals. The regulatory verdict will see their contract with ITV rolled over for another three years, on the same terms, to prevent the merged ITV using its increased muscle to raise ad rate. This is known as contract rights renewal or CRR.

The OFT, which published a separate opinion on the deal yesterday, appeared to side with advertisers, who have said a behavioural solution is unworkable. The OFT suggested that, given the concerns about CRR, the DTI "may wish to consider alternative remedies".

The OFT characterised the views of advertisers as "substantial concerns" and questioned whether the CRR remedy is "capable of effective implementation and monitoring". The OFT also seemed to be drawn to the main alternative remedy, a structural solution which would have seen Carlton and Granada divest both their sales houses to get the merger cleared. "This [divestment] remedy would steer clear of some of the difficulties of the CRR remedy," the OFT said.

Sarah Brown, a member of the five-strong team at the Competition Commission that examined the deal, wanted the double divestment remedy, saying the effectiveness of the roll-over solution would diminish over time and that it did not address ITV's likely dominance of the advertising market for years to come.

However, Mrs Brown was overruled by the others, who decided that double divestment would damage ITV and its competitive strength, by again preventing the broadcaster from unifying. The commission said it was important that ITV's competitive position be boosted, a view that chimes with political concerns and it was echoed by the DTI.

Patricia Hewitt, the Secretary of State for Trade and Industry, said: "The merged company will be able to compete more effectively with the BBC, Channels 4 and 5, and BSkyB.

"Technological and regulatory developments have changed the broadcasting landscape and the position of ITV has become increasingly difficult to maintain. A stronger ITV will be better able to invest in and provide programming of high quality, including regional programmes."

The likely outcome appeared to have leaked over the weekend, sending the shares in the companies shooting up on Monday. Yesterday, they rose further, as investors absorbed how favourable the verdict was and the fact a merged ITV will make a much more attractive bid target. Granada closed up 9 per cent at 112.25p, while Carlton soared 13 per cent to 205p.

The confident prediction of the regulatory outcome in the weekend press sent the City rumour mill into overdrive. A behavioural solution was not seen as the most likely outcome right up to the end of last week.

Charles Allen, Granada's chairman, said: "The new ITV will have one vision, one strategy and one management. ITV will have more investment in programmes than any other commercial broadcaster in Europe."

Carlton's chairman, Michael Green said: "The days of different companies with different agendas working in a 1950s federal system are finally at an end."

Sky, Channel 4 and Channel 5 opposed the deal and wanted, as a minimum, for Carlton and Granada to be forced to divest their sales houses.

It is understood that these rivals have already held informal talks on responding to a unified ITV by merging their sales operations.