 Write-up in the IC under "Ideas of the Week" FWIW:
This broadcaster has an edge over its rivals
Its production arm could be worth more to a bidder than the group's entire market capitalisation
Takeover rumours seem to be the only thing that have put any spark into ITV (ITV) shares lately.
The television company has been a perennial underachiever, having lost 50 per cent of its value over the past five years. After reaching a 12-month high of 89p in July this year, the shares appeared to be reverting to type, slipping back to 62p in November. They perked up again, however, when Sky News reported interest from several buyers for some – or all – of the business. Private equity firm CVC Capital (NL:CVC) and broadcaster Television Francaise 1 (FR:TF1) were named as potential suitors.
We have been here before, of course. Two years ago, the Financial Times reported that management had been exploring a partial sale of the ITV Studios business to try to unlock some of the value that it felt was trapped in the business. Despite some big investments made in streaming and content since then, and £182mn (as of mid-December) being spent on buybacks, ITV shares are just as cheap now as they were then.
In some ways, this is understandable. Its financial performance has worsened, with adjusted operating profit declining by 12 per cent in 2022 and then 32 per cent last year. Things haven’t gone swimmingly this year, either. Revenue fell by 3 per cent in the first half and 8 per cent in the third quarter, with the company blaming delays in the delivery of new shows on the overhang from last year’s Hollywood actors’ and writers’ strikes.
Most of the analysts tracked by FactSet are of the view that at its current rating, ITV is at least fairly valued, if not overvalued.
On a forward price/earnings multiple, ITV sits between its European counterparts – below Germany’s RTL (DE:RRTL), but ahead of France's TF1 and Italy’s Media For Europe (IT:MFE), owner of the Mediaset network. To varying degrees, all of these companies are grappling with the decline in traditional, or linear, TV, which has weighed on valuations.
TV go home
In the UK, the amount of TV watched live or on catch-up fell by 6 per cent last year. Viewers watched an average of 109 minutes of live TV per day, down from 174 minutes in 2017, according to communications regulator Ofcom.
The fall is due partly to the growth in popularity of video streaming platforms such as Netflix (US:NFLX), Amazon Prime and Disney+, but also the fact that many young people are not watching TV at all, instead turning to YouTube and TikTok. According to Ofcom, less than half of 16-24-year-olds tune into live TV over the course of an average week.
This is not a new development. Over the past decade, the compound annual growth rate of live TV viewing among people born after 1997 is minus 12 per cent, according to Bernstein analyst Simon Baker. As a result, the share of advertising spend taken by European broadcasters has almost halved, from around 28 per cent a decade ago, he adds.
This younger cohort is currently only responsible for about 6 per cent of consumer spending, but this figure is expected to rise to a quarter by 2035. The fear that advertisers will follow them is perhaps the main reason why sector valuations are depressed, with companies trading at an average enterprise value of around 6.5 times cash profit, according to FactSet.
And yet somehow TV companies are continuing to squeeze more revenue from advertisers, with revenue growing by an average of 2.5 per cent over the past decade, according to Bernstein, which forecasts continued growth of 2.8 per cent over the next four years.
They are able to do so because, in an increasingly fragmented media landscape, they can charge “a premium for mass market reach”, Baker says. “The attraction is that you’re avoiding wastage. If you can advertise once to 6mn people instead of six times to 1mn people, you avoid overlap.”
Value case
On top of this, ITV has something of a crown jewel that its European peers lack – a studios business that makes and then sells English language programmes to broadcasters around the world.
ITV Studios generated more than half of the group’s revenue and 58 per cent of its adjusted cash profit last year and is the piece of the company that is of most interest to bidders such as CVC and Redbird IMI, according to Sky News.
Any break-up would be a complicated affair – particularly as 29 per cent of the revenue ITV Studios ‘earns’ is for content it currently produces for itself. But it might also be the only way of releasing the value that Shore Capital analyst Roddy Davidson argues is trapped within ITV’s “stubbornly underwhelming” valuation.
ITV is currently valued at just over £2.7bn, but Davidson estimates that the production business alone is worth £2.3bn-£2.5bn – possibly more if a bidding war broke out.
Analysts point out that RedBird IMI paid $1.45bn (£1.15bn) for All3Media (maker of The Traitors and Gogglebox) earlier this year, which was a multiple of 10.7 times Ebitda. Similar deals over the past decade have been done at 10-12 times Ebitda.
Applying a 10 times multiple to ITV Studios would value it at over £3bn, and if a “discounted221; multiple of six times was attached to the remainder of the group, it would be worth another £1.65bn, according to Bernstein’s numbers. Based on these numbers and subtracting its £600mn of debt implies an equity valuation of around £4bn, or 105p a share – an almost 50 per cent premium to the current share price.
Yet Baker also thinks ITV’s bosses would want to avoid a break-up “unless it was under a significant amount of shareholder pressure”, given the integrated nature of the studios arm.
Without a bid, investors might have to wait longer for a return – especially if they bought close to the peak of over 280p it last hit nine years ago. The withering of its operating margin from 26 per cent then to just 9 per cent last year hasn’t helped.
The X factor
But there were extenuating circumstances to last year’s fall – 2023 represented the peak of its investment in its own streaming platform, ITVX, which launched two years ago and has already become “the UK's largest commercial broadcaster video-on-demand platform”, according to ITV’s chief executive Carolyn McCall.
It is the fourth-most considered streaming service in the UK (behind Netflix, Prime and Disney+) and has ambitions to be in the top three within the next couple of years, chief viewer officer Jane Stiller said.
It is also the fastest growing. In the two years since its launch, the number of streams watched are up 77 per cent on the prior two-year period.
One advantage is that this has brought in a younger audience, with 56 per cent of those watching streams under the age of 55, compared with just 33 per cent for total TV viewing, said ITV’s director of content, Rosemary Newell. Another is that it means ads get watched, overcoming the problem that commercial broadcasters have had since the invention of the video recorder of people skipping through ad breaks.
ITV’s total digital revenue grew by 19 per cent to £490mn last year and the company has set a target to increase this to at least £750mn by 2026. It’s also been tackling overheads, announcing in its third quarter that it had found an additional £20mn of net cost savings, on top of the £40mn it had pledged to deliver through a restructuring and efficiency drive.
Analysts are therefore expecting a 17 per cent improvement in full-year operating profit this year, and with dividends expected to remain steady at 5p, the shares currently offer a yield of nearly 7 per cent. With about £53mn of the proceeds from the sale of its half of Britbox still to be spent on buybacks, there are enough positive catalysts to suggest a re-rating should be achievable even if no suitor emerges. |
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