Granada-Carlton merger hits trouble

TV turmoil: Competition authority threatens broadcasting partnership with loss of both ad sales houses

The proposed merger of Carlton and Granada was dealt a heavy blow yesterday after the Competition Commission appeared to suggest the deal would only be allowed if both the companies' sales houses are divested.

Analysts said that if the merger is allowed only on the basis that the two sales houses are left out of the deal, Granada and Carlton, the two main ITV companies, may well decide to call the whole thing off.

Paul Richards, analyst at Numis, said: "If it was a case of separating both sales houses, they would look very closely at the merger. It would be very close to a deal breaker."

The "issues letter" from the regulator did not even mention the competition remedy that was thought most likely: that one sales operation would have to be separated, to give advertisers a choice of ITV sales house to go to.

One leading media lawyer, said: "This is a base sign for them [Carlton and Granada]. It suggests that the minimum the Competition Commission is thinking about at the moment is the separation of both sales houses."

Publicly, the two companies have maintained that they should be allowed to merge with their sales operations fully intact and integrated. Privately, it is thought that they are reconciled to getting the deal through on the basis that one sales house will be separated.

The lawyer said: "No decision has been reached but the one sales house idea is not even on the agenda.... I always thought this deal raised serious competition issues that would be hard to resolve."

By contrast, the betting among most City analysts has been that the deal would be cleared, with one sales house going at most. Lawyers said that investors had underestimated the regulatory challenge. Even yesterday, most City commentators reckoned a viable deal would be allowed.

One analyst said that if the City began to believe the deal would be blocked or that the remedies would not make it worthwhile, Carlton shares, in particular, would collapse. It is the junior partner in the merger and is a smaller company that, it is believed, needs the deal more.

The Competition Commission's four remedies, if the deal is found to be against the public interest, are: a complete ban, making both sales houses independent, imposing a code of conduct, and a catch-all "any other remedies". Combining the sales houses of Carlton and Granada will give the merged company more than 50 per cent of the television advertising market. Just four ITV franchises would be outside the combined entity.

Sarah Simon, analyst at Morgan Stanley, said: "At first read, it looks surprising that the Competition Commission has not mentioned a single sales house [to be separated], but they have left themselves with a blanket option too."

The competition watchdog has met parties affected by the deal, including those such as Channel 4 who oppose it. Although Carlton and Granada have given detailed written evidence to the commission, company management has yet to meet the regulators face-to-face. Those meetings will start next week, it is believed, when Carlton and Granada can put the argument for the separation of just one sales house. The final verdict from the Competition Commission is expected in June. A merger of the non-sales operations will yield cost savings of £35m a year, while the sales houses would add a further £20m, according to Carlton and Granada.

Even if only one sales house is separated from the merged Carlton and Granada, it is unclear how it would be kept genuinely independent. The sales operation is core to the ITV business and provides the majority of its revenues. Separating both sales houses would present even more operational challenges. Under those circumstances, a Carlton and Granada would bring together just their broadcasting and production arms.