For Broadcast July 05, 2007

How did the City receive Deloitte’s report on ITV’s PRS? And how fast can RDF Media recover from Queengate?

How did the City receive Deloitte’s report on ITV’s PRS?

Defrauding the public is serious stuff but ITV executive chairman Michael Grade seems to have at least partially reassured the City by acting quickly.

The financial hit from round one of the premium rate services (PRS) saga was higher than some analysts had pencilled in. Investec thought the all-in cost of the Deloitte-led investigation would be closer to £12m, rather than the £18m charge announced by ITV last week. That charge includes the cost of the Deloitte investigation, the GMTV fine and the reimbursements to viewers.

ITV shares fell in the two days following the PRS announcement, closing Friday at 98.3p, their lowest level in the past year. This is concerning but needs to be viewed in context. The PRS scandal is a one-off charge and £18m may seem a lot, but at 0.4% of ITV’s market cap it is best described as a rounding error.

Round two of the PRS fallout is on the horizon, including the possibility of an Ofcom fine and further revelations from an investigation into the British Comedy Awards. As to the fine, press reports have mentioned £70m, a figure that seems way too high. Given that GMTV took £35m off punters and was fined £2m, how does ITV defrauding £7.8m work out to a £70m fine?

In any case, even a £70m fine would equate to about 2% of ITV’s market cap. As one analyst told me, the size of a potential Ofcom fine is only relevant if it starts to affect the credibility of Grade, or if advertisers think twice about buying ad spots. Neither looks likely at the moment.

A possible investigation by the Serious Fraud Office suggests the line has not yet been drawn under the PRS scandal, but for the moment the City is more focused on the loss of revenue and the softness of the advertising market in general than anything else.

Investec believes ITV’s PRS revenue will fall to £5m for this fiscal year, down from £15m a year earlier, and Deutsche Bank downgraded ITV in late September in anticipation of a consumer spending slowdown that could lower TV ad spend to -0.5% year-on-year in ITV’s fiscal 2008, versus previous expectation of 2.1% growth.

Deutsche also believes that any relief from changes to the CRR regime will not be realised until 2009, so what the City is looking for now is new revenue upside. It may be that the real impact of the Deloitte report isn’t a short-term financial hit but rather the long-term need to find a replacement revenue stream.

How fast can RDF recover financially from Queengate?

RDF boss David Frank thinks it will be 18 months before the indie knows if Stephen Lambert’s mea culpa departure over the Queen edit will be particularly damaging. That’s a long time, especially for the City.

Stephen’s responsibilities are being shouldered by Nigel Pickard, Grant Mansfield, Hamish Barbour and Rob Pursey and even in a relatively diversified indie like RDF, its main currency is ideas, so the pressure is on these guys. The good news for RDF is that ITV has approved its new “compliance procedures” and lifted its commissioning ban on 18 October.

The market reacted positively to the news, pushing RDF shares up 7.5p to 192.5p on the day, beginning (a very long) climb back to pre-crisis price levels that touched 259p in June.

The BBC’s ban of RDF new commissions is still in place as the dust settles around the departure of Peter Fincham. No one believes it won’t be lifted but I wouldn’t relish being those making the first post-ban BBC pitches.

The next key date for judging the overall impact on RDF will be 31 October, when it publishes interim results. Watch this space.