ITV needs radical action

ITV's executive chairman Michael Grade poses for photographers after a meeting in London March 7, 2007.

LONDON (Reuters) - Commercial terrestrial broadcaster ITV needs further radical action if it is to have a long-term future.

Caught by both cyclical and structural change, the home to talent show the X-Factor and soap opera Coronation Street may have to suspend its dividend, increase cost savings and consider a rights issue if it is to protect its programming budget and retain advertisers.

It may also be forced into non-core asset sales as it confronts the rapid downturn in advertising.

Such an approach may even find favour with investors.

"I believe shareholders will say they'd rather have something that has got a heart beating in a few years time than something that is going to be dead," said analyst Claire Enders at consultancy Enders.

Last week a source familiar with the situation said the broadcaster would even consider a merger with rivals Channel 4 and Five, an admission seen more as a cry for regulatory help than an actual plan as it would break competition rules.

Like free-to-air broadcasters across Europe in recent years, ITV (ITV.L) has suffered as its audience and advertisers moved to more niche digital channels and the Internet.

But in 2008 this was compounded by an advertising collapse and its ad revenue is expected to be down around 20 percent on the main ITV1 channel in the first quarter of 2009 alone.

While many analysts believe ITV's finances are manageable, a pension deficit of 221 million pounds and obligations, plus debt of 663 million pounds compared with its stock market value of over 900 million pounds cause concern.

ITV Finance Director Ian Griffiths was at media group Emap when it secured a buy-out of its pension schemes, but such measures have got more expensive in recent months.

Ahead of its 2008 results on Wednesday, the stream of negative news has hammered ITV shares and they are now down almost 80 percent in the last two years. The stock yields about 11 percent, more than double the domestic market as a whole according to Reuters data, suggesting investors have already factored in a dividend cut.

Meanwhile an improvement in the quality of programming which was pledged by broadcasting veteran Michael Grade when he became executive chairman in 2006 is not yet fully evident.

PLUNGING AD REVENUE

Analysts at Deutsche Bank highlighted pressures on the company when they recently cut their estimate for domestic television advertising spend in 2009 to a decline of 9 percent from a drop of 7 percent, with spending on ITV1 seen down 12.2 percent.

"This means ITV could sail close to a covenant breach which could limit financial flexibility", Deutsche analysts said in a note. "The fact that advertisers have shown little interest in April (when Easter falls this year) is concerning when early indications were that ad spend might be down 5 percent and now appear to be down 20 percent."

UBS and other analysts believe ITV should consider a rights issue before it becomes even harder to raise money.

"While our cash flow forecasts suggest that ITV will not face liquidity issues until September 2011 (and indeed it may not need additional capital at all if there is an advertising recovery), we believe that it would be prudent for ITV to seek additional funding at the earliest opportunity," UBS said.

"If ITV were to wait, there is a risk that the advertising market deteriorates further or that expected regulatory benefits do not meet expectations, in which case ITV may be in a weaker position to raise funding."

Analyst Paul Richards at brokerage Numis said there was a window to raise capital and said it was better to do something sooner. A one-for-two issue at 15 pence would raise around 300 million pounds, Numis said, compared to the current 24 pence share price.

With any balance sheet issues answered, ITV could even acquire assets and emerge stronger from the downturn.

Under former BBC boss Grade, ITV has pledged to improve its programming, increase digital revenue and earn a relaxation of the regulatory rules.

It has gained some success, with the watchdog saying it will consider relaxing the mechanism governing how much ITV can charge advertisers on its main ITV1 channel. However it appears unlikely to recommend the complete abolition of the system.

The broadcaster has pledged to take 116 million of costs out of the business over a five year period and analysts expect this to be increased, with possible sales of non-core assets such as the Friends Reunited social network also being considered.

Analysts believe ITV may also have to trim its broadcasting budget by a few percent, but the broadcaster has to be careful -- cut too much and viewers may switch over, with advertisers not far behind.

(Editing by David Holmes)