Market Report: ITV should raise cash, says house broker

By Nikhil Kumar
Wednesday 18 March 2009 01:00

ITV's joint house broker reignited the rights issue debate last night, arguing that the broadcaster should tap shareholders for as much as £500m to mitigate balance sheet risks.

UBS highlighted the continued uncertain outlook for advertising revenues at the broadcaster, saying that a further 5 to 10 per cent decline in the TV market "would leave ITV with a significant funding gap in 2011, which would be difficult to fill with [the ratio of] net debt to earnings approaching 10 times."

In light of these risks and despite the fact that it is unlikely to face liquidity issues until late 2011, the broker said the company should raise cash as an "insurance policy".

Taking account of the pension deficit, UBS, which also upgraded the stock to "neutral", estimated a figure of between £400 and £500m should be enough to insulate the company from the worst of the downturn, and save it from having to approach shareholders more than once.

While the company's shareholder base – around 25 per cent of the stock is owned by US investors, who are unable to sub-underwrite an issue – may complicate a straightforward capital raising, ITV could go the way of Wolseley, the construction materials group which was eventually able to skirt similar issues by undertaking a fully underwritten placing and an 11-for-5 rights issue.

Possible hurdles relating to the regulatory uncertainty around BSkyB's 17.9 per cent stake may also be averted, as Sky could sell its rights in the market and, according to the broker, allow its stake to be diluted to a level acceptable to the regulators while maintaining an exposure to the recapitalised ITV. At the close, the stock was 2.6 per cent, or 0.5p, lighter at 18.5p.

Overall, the FTSE 100 came off the boil, losing 6.9 points to 3,857.1, while the FTSE 250 was 58.5 points behind at 6,211.7. Despite its weakness, the bench-mark was better off at the close than in early trading thanks to gains on Wall Street, which was lifted by some better-than-expected data on the US economy.

The heavily weighted mining sector was unsettled by falls in the cost of leading industrial metals. The Eura-sian Natural Resources Corporation, down 9.3 per cent, or 38.5p, at 375p, was the weakest of the lot, slumping to the bottom of the benchmark index as investors digested recent news of a sharp fall in Kazakhstan's industrial output.

Rio Tinto, down 5.6 per cent, or 119p, at 1,982p, fell back after announcing that Jan du Plessis, a Rio non-executive director and the boss of British American Tobacco, will be appointed chairman next month.

Xstrata proved more resilient, advancing by 5.75p, to 395.75p, after UBS weighed in with a "buy" note. After the close, the Anglo-Swiss miner said it had received valid acceptances in respect of 99.42 per cent of the total number of new shares offered to shareholders as part of its cash call.

Elsewhere, in the banking sector, HSBC was 4 per cent, or 18p, stronger at 460p after Goldman Sachs moved the stock to "neutral" from "sell".

Tesco was 5.7p ahead at 342.5p, as traders factored in an overnight upgrade to "equal-weight" from "underweight" by Morgan Stanley.

AstraZeneca, on the other hand, was just over 1 per cent, or 29p, behind at 2,424p, and GlaxoSmithKline was 2.3 per cent, or 24.5p, weaker at 1,036p, despite words of support from JP Morgan, which said EU pharma stocks had been oversold. "Concern about President Obama's US healthcare reform has been one of the major reasons cited for the pharma sell-off – despite the fact that the negative impact on operating profit (essentially a 7 per cent increase in Medicaid rebate) is only around 1 per cent," the broker said, adding that "even if uncertainty on more far-reaching US Government actions on pricing will represent an overhang for some time, total returns from large-cap pharma should still be attractive in view of [the] high dividend yields."

In the mid-cap space, a lack of debt-management measures sent Debenhams tumbling to 41p, down 10.8 per cent, or 5p, as disappointed investors ignored an otherwise positive trading update. In response, Panmure Gordon moved the stock to "sell" from "hold", citing "the inevitability of a rights issue and possibility of a scrapping of the dividend".

"Because Debenhams has already sold and leased back its freehold property and also because it is a one product company, there is no obvious other means of reducing its debt of circa £950m quickly," the broker said. "Until this is sorted, the share price has moved too far ahead of itself."

On the upside, WS Atkins was strong, jumping by 9.7 per cent, or 45.5p, to 514p after Goldman moved the stock to "buy" from "neutral". UBS also weighed in, removing Atkins from its least preferred list of European support services stocks.

Mondi was less fortunate, losing 7 per cent, or 12p, to 158.2p as a Goldman Sachs upgrade to "neutral" was overshadowed by worrying comments from chief executive David Hathorn, who was reported as saying that there were likely to be further cuts in capacity across the paper industry.

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