For Broadcast August 16, 2007

What does the global credit crunch mean for Virgin Media?

Virgin Media is in a classic catch-22. It continued to underperform in the second quarter but the crisis in the credit markets landed a punch that derailed interest in a prospective buy-out.

Before the bottom fell out of the credit markets, bidders had been lining up to look at the UK's only cable TV operator. Interest was led by private equity firm Carlyle Group, whose $32 to $33 a share informal approach in July triggered the Virgin Media auction.

There was soon interest from other PE firms and Liberty Media, Europe's largest European cable operator, headed by John Malone, one of the savviest media investors around.

Unfortunately for VM, the US sub-prime mortgage market began to wobble, which caused a contraction in the easy credit markets that private equity has used to hoover up acquisitions in recent times. VM then announced a delay in its auction because most bidders would struggle to raise a combined debt and equity package of over $20bn.

With a $12bn debt load, anyone who buys VM either needs access to cheap credit or a synergy strategy - or both. Liberty Media has about $5bn to spend on acquisitions and gaining a foothold in the UK would complete its European footprint. But Malone has never been one to buy where there is limited upside.

VM hopes to be able to restart the auction in the autumn but a lot depends on the health of the credit market. Morgan Stanley says that without a buyout, Virgin Media is worth as much as $27 a share and as little as $22 a share. If the credit markets come back or Malone steps up, the company could be worth $31 a share, it says. The bad news for VM investors? That's already $1 to $2 less per share than Carlyle indicated it might pay for Virgin Media before the credit crunch.

Are ITV's improved figures good news for other broadcasters?

There's no ignoring the "ITV effect" when it comes to broadcasting. When the biggest commercial broadcaster announced its results on 8 August, its shares rose to 109.7p, giving the company the largest gain since May. This was mostly off the back of better than expected net income and the promise of an improving advertising picture going forward.

On ITV's announcement day, radio stocks like GCap plus broadcaster share prices at SMG and UTV also went up.

But the halo effect didn't last long for anyone Ð ITV included Ð with share prices slipping back. However, the share slippages at SMG and UTV were more about the broader market than any substantial news from either of the companies.

The mid-cap market (where both SMG and UTV sit) has taken a hammering from the credit crunch and companies, as one equities analyst said, "have not been able to hold onto good news." In addition to that, both UTV and SMG are in closed periods in advance of financial results set for September.

Perhaps the most important part of what ITV exec chairman Michael Grade called ITV's "turnaround" is his proposal to reform the Contract Rights Renewal rules, which link ITV's advertising revenue directly to its TV audience share (see story above). CRR is a "blunt instrument," according to Grade, that is depressing the entire broadcasting sector. He is correct because ITV is the effective market maker of UK ad rates because of its size. Where ITV goes, the sector follows.

Advertising is inexorably moving away from TV because of the internet, but the question is, how much and how fast? Improving the TV shows and reforming CRR are important for ITV, but they are also important for the sector as a whole.