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Update ITV in a grim mess - 10-March-2009, 10:50

ITV in a grim mess

Nobody doubts that ITV, the UKs main commercial network, is in a mess. Michael Grade, despite his undoubted entrepreneurial talents and showbiz touch, has failed to restore the broadcasters normal advertising buoyancy and is facing an even tougher 2009. Indeed, a report from Morgan Stanley on ITV does not make happy reading.

Grade has just announced 2.7bn of losses, and announced studio closures, a dramatic cut-back of popular drama, and the goodwill which was in place two years ago is evaporating like Spring snow. One weekend comment said: ITV is a ticking time bomb. It is becoming a business that is no longer a must buy for advertisers.

Investment bank Morgan Stanleys note on ITV is grim, grim, grim, despite ITVs actual results being more or less in line with the banks expectations. What alarms Morgan Stanley is that with a 20p share price (Mar 9 saw them at 18p) then its market capitalisation is just 775m, which is almost matched by ITVs debt level of 730m. ITV ended 2009 with net cash of 616m. It has 200m of bilateral finance facilities and in February 2009 increased its liquidity by another 50m under a new ten year loan. The liquidity reduces by 170m for earmarked and difficult to access cash, ITV paid off the March 250m Eurobond 2009 and there have been another 111m of payments related to Friends, dividends and pension payments. ITVs net available resources are presently 332m, says the banks note.

Those are the big numbers. The problem for ITV is that it is directly exposed to UK consumer trends and theyre not good. 60% of its advertising comes from retail (21%), leisure, food, finance, Entertainment & Cosmetics/Toiletries. And these areas are all under pressure from the downturn. A prolonged downturn and commensurate advertising decline, especially if continued into 2011, would send net debt/EBITDA into
double digits, says the bank. Investors fears over debt levels and the pension deficit would mount. This bear case scenario would be near-catastrophic for ITV, and could lead to a share price of just 5p.

But for each bear case theres also a bull case, which assumes ITV1 NAR growth of -10% in 2009, zero in 2010 and +2% in 2011. The bull case assumes the benefit of CRR reform, full delivery of ITV s planned savings and 50m extra PSB benefits in 2011. Net cash generation is 363m in 2011/12. Net debt/EBITDA moves back to 1.5x by 2011. Liquidity issues are avoided, says the banks report.
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