ITV fears NTL bid will hit ad revenue deal

ITV management fears that a takeover by the cable group NTL would scupper the chances of convincing regulators to lift a key regulatory constraint that cuts its advertising revenues.

Even though NTL's channels business is relatively small, combining it with ITV's market-leading stations would give the enlarged group a significantly higher portion of the commercial television audience and advertising revenues. This would make it much more difficult for regulators to justify giving concessions to ITV. Last week, NTL approached ITV over a £5bn takeover.

ITV has campaigned loudly for a year to convince competition watchdogs and the media regulator Ofcom to review Contract Rights Renewal (CRR). This is a mechanism imposed on the company by regulators in 2003, as a condition of clearing the merger of Carlton and Granada to form ITV plc.

CRR reduces advertising revenues for the main ITV1 channel in proportion to its loss of viewers. It is thought that CRR takes some £100m a year from ITV. The company and the City were hopeful that CRR would be lifted next year.

One ITV source said: "CRR would just be kicked into the long grass if ITV were taken over by NTL."

City forecasts of ITV's future profits all assume that CRR will be lifted by the end of next year. ITV is already in "dialogue" with regulators over the issue.

Ironically, it is ITV1's poor viewing performance that has given the company a case to have CRR removed. Along with the fall in audience, ITV's share of UK television ad revenues has also plunged. ITV had an estimated 47 per cent of the television advertising market in 2005, falling to around 42 per cent this year. On current trends, it is likely to dip below 40 per cent next year, the level that regulators have indicated is necessary before CRR can be reviewed.

However, NTL has an estimated 4 per cent of the UK television advertising market, so a combination with ITV would postpone the lifting of CRR, City analysts believe, knocking a hole in future profit forecasts for ITV.

According to figures from Merrill Lynch, ITV1 and the company's digital channels had 22 per cent of the audience in homes with multi-channel television in the first nine months of this year. NTL had a further 6 per cent, through its UKTV joint venture with the BBC, which has channels such as UK Gold, and its Flextech arm, which has stations such as Living and Bravo.