‘Celebrity Love Island’ Is a Temptation for Bankers

(Bloomberg Opinion) -- Carolyn McCall has got started with a new strategy to address the challenges facing U.K. broadcaster ITV plc. The question is whether she gets to finish it. ITV goes into 2019 with its shares at a five-year low and the uncertain backdrop of Brexit. If the maker of “Love Island” attracts an opportunistic suitor, its defenses will be weak.

This is McCall's second year as CEO, and it has to be a year of action. Her predecessor, Adam Crozier, pulled the business out of the mire, but the job of adapting a mainly advertising-funded, free-to-air broadcaster to new competitive threats is incomplete.

McCall's plan sounds convincing. ITV's problems aren't just about the decline of traditional viewing habits and the fragility of the British consumer. The company hasn't been making the most of its assets. It reaches 50 million consumers, including its followers on social media. But it is only just starting to think seriously about treating them as customers who might be interested in things other than its current programs.

The brand punches below its weight. ITV's own research shows that people will often assume its lavish costume dramas and edgy thrillers are BBC or Netflix productions. The back catalog is crying out for a searchable on-demand platform. The company's studios business could do a lot more adapting of successful formats for overseas markets.

A subscription service is to be launched this year — a critical moment that McCall needs to go right. But her strategy, while sensible, requires investment. That will be a drain. And if people aren't won over by ITV's content app, in a saturated market dominated by big beasts like Netflix, HBO and Amazon, maybe its programs would be worth more to the owner of another platform.

ITV's market value is about 5 billion pounds ($6.3 billion). Add a conventional 30 percent takeover premium plus 900 million pounds of estimated net debt, and a bid, at an implied 160 pence a share or thereabouts, could cost 7.4 billion pounds. With the business forecast to make roughly 850 million pounds of operating profit in 2020, a buyer could envisage a starting return on investment in line with ITV's estimated 9 percent cost of capital, without the need for synergies.

The stock has fallen so far that a takeover at this level would mean the shares were at the implied takeout price as recently as October, and analysts have 12-month targets averaging 176 pence. But that alone is not a defense.

Sky was in a similarly vulnerable state in late 2016, with profits falling into an investment trough and the market fretting about Brexit. A low-ball bid from Rupert Murdoch came in December that year. Only thanks to competing interest from Comcast Corp. did shareholders end up getting full value for their shares. The difference is that Sky is a unique European content platform with an established base of paying subscribers, valuable English soccer rights, and proven innovation capabilities. It offered a singular chance to diversify away from the U.S.

ITV, while it has a large audience, is only in the U.K. and doesn't have paying subscribers. Its appeal is its studios business, and the the chance to build a paying user base. But would these be enough to drive an auction?

McCall set out her stall in a day of investor presentations back in September. It's to be hoped that she held some ideas back. The shares have only sunk further subsequently, another eerie echo of Sky's pre-bid history. If someone does make an offer, she'll need to have something more to say.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.