The forced divestment of Carlton & Granada’s sales houses would render the ITV merger ineffective, according to analysis by Lehman Brothers.
Trade and Industry Secretary, Patricia Hewitt is due to announce her decision on the merger this week, following an exhaustive Competition Commission investigation into the likely implications of the deal.
The Lehman study pretty much rules out a complete block, claiming that this is less than 10% likely. It is thought that the Commission will adopt a forward looking stance and a ban on the Carlton-Granada tie-up would fly in the face of the Government’s attempts at light-touch regulation, set out in the Communications Bill.
Lehman claims that while divestment would satisfy the majority of advertisers, agencies and broadcasters, it would be “value destructive” and outweigh the benefits of the merger, namely cost savings and more efficient management. In the first instance, it would have a detrimental effect on ITV’s sales and Carlton’s reliance on advertising is such that the merger would be instantly less attractive to Granada’s board and shareholders.
The two companies also face the prospect of extra costs if they are compelled to sell their sales divisions. In addition to a £20 million loss of synergies, money would have to spent recreating some of the functions, such as research, internally. It is calculated that the potential damage to the advertising line leads to downside of between 5% and 16%.
The difference between a merger with behavioural remedies and one that is conditional on sales house divestment is also spelled out in Lehman estimates which show earnings growth to 2006 to be more than 180% in the first case and only 25% in the latter.
The investment bank has consistently maintained that a structural remedy is the most likely outcome (50-60%) with only a 30% chance of a behavioural remedy. However, Carlton and Granada must be encouraged by new reports which suggest that the merger will passed this week with only minor conditions attached.
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