ITV’s Shocking Drama Strategy Could Drive Shareholders Away!

The Shift in ITV’s Business with Potential Acquisitions

ITV, Britain’s leading commercial television company, is considering potential acquisitions that could shift the balance of its business towards Studios. This strategic move aims to reduce the volatility caused by cyclical advertising revenue. The two potential targets for acquisition are Warner Bros Discovery-owned All3Media and John Malone’s Liberty Global, which already owns a tenth of ITV.

The Potential Acquisition of All3Media

All3Media is valued at around £1 billion and reportedly generated £750 million in revenue in 2020. If the acquisition goes through, it would be the largest buyout of an ITV production company to date. All3Media’s extensive library of popular shows, including “Midsomer Murders,” along with multinational repeatable formats like “Gogglebox,” would significantly contribute to ITV’s Studios segment. All3Media’s library hours of 30,000 constitute a third of ITV’s total.

This move towards Studios would not only diversify ITV’s revenue streams but also provide more stable and recurring revenue, which is preferred by the market. By relying less on cyclical advertising revenue, ITV aims to mitigate earnings cyclicality in the future.

The Financial Considerations

An important factor in this potential acquisition is ITV’s financial ability to finance such a large cash outlay. It is estimated that ITV will generate around £250-300 million of free cash flow going forward. While ITV has a healthy balance sheet with net debt approximately equal to term EBITDA, a substantial portion of the free cash flow is allocated to dividends. This leaves room for considering debt financing for the acquisition.

However, there are concerns regarding ITV’s sensitivity to changes in advertising spending. Even with the stability provided by All3Media’s revenue, ITV’s earnings per share are still affected by fluctuations in ad revenue. Barclays estimates that for every 1% drop in ad revenue, earnings per share are reduced by 4%. This consideration contributes to the somewhat tepid reaction in ITV’s share price to the prospect of the acquisition.

Implications for Executives and Shareholders

The lukewarm response in ITV’s share price should serve as a prompt for executives to carefully evaluate the potential acquisition and its impact on the company’s financials and performance. Shareholders, like fickle spectators, are likely to reconsider their commitment if they are not satisfied with the outcome of the acquisition.

An Expanding Landscape for ITV’s Studios

If ITV proceeds with the acquisition of All3Media, it would mark a significant expansion for the company’s Studios segment. With All3Media’s substantial library of popular shows and repeatable formats, ITV can tap into a wider range of content that appeals to both local and international audiences.

The addition of All3Media’s content library, which amounts to a third of ITV’s current library, would enhance ITV’s offerings and further establish Studios as a key revenue driver. The expanded portfolio of shows, including lucrative franchises like “Midsomer Murders,” would attract more viewers and advertisers, strengthening ITV’s position in the highly competitive television market.

Moreover, All3Media’s library provides the opportunity for ITV to explore various distribution channels and licensing agreements. As the streaming landscape continues to evolve and demand for captivating content increases, ITV can leverage its expanded library to enter new markets and partner with prominent streaming platforms.

Conclusion

The potential acquisition of All3Media and Liberty Global by ITV represents a strategic move that aims to shift the balance of the company’s business towards Studios. By reducing its reliance on cyclical advertising revenue, ITV seeks to mitigate earnings cyclicality and generate more stable and recurring revenue.

However, ITV’s sensitivity to advertising spending fluctuations and the allocation of free cash flow to dividends pose challenges and cautious considerations. The lukewarm response in ITV’s share price emphasizes the need for careful evaluation by executives and the importance of satisfying shareholders.

If the acquisition goes through, it would significantly expand ITV’s Studios segment, providing a wealth of popular shows and formats that appeal to both local and international audiences. This expanded portfolio has the potential to attract more viewers and advertisers, bolstering ITV’s position in the competitive television market. Furthermore, All3Media’s library opens doors to explore new distribution channels and licensing agreements, enabling ITV to tap into the evolving streaming landscape.

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Channel hopping suits bored couch potatoes. But it does not favor a broadcaster like ITV. Britain’s leading commercial television company relies on cyclical advertising revenue for almost half of its mainline. Buying production companies is meant to smooth out any volatility due to viewer fickleness.

ITV on Friday said its next acquisition could be Warner Bros Discovery-owned All3Media and John Malone’s Liberty Global. The latter in turn owns a tenth of ITV.

This would shift the balance of ITV’s business towards Studios. Worth around £1 billion, All3Media reportedly had around £750 million in revenue in 2020, Citi notes. While these figures are inaccurate, it would probably be the biggest buyout of an ITV production company yet. Studios, so far growing steadily over the years, would then drive the revenue contribution.

All3Media has a sizable library of locally popular shows including Midsomer Murders and multinational repeatable formats like Gogglebox. All3Media’s 30,000 library hours are substantial, a third of ITV’s. All of this should mean more recurring revenue, which the market prefers, and less ITV earnings cyclicality.

But can ITV afford a large cash outlay? ITV is expected to generate around £250-300m of free cash flow going forward. A healthy balance sheet – net debt roughly equals term EBITDA – leaves room for using debt financing. But a large part of the free cash flow goes to dividends. And even if ITV could use All3Media’s more stable revenue, it’s a little early to ignore the broadcaster’s sensitivity to changes in advertising spending. All else being equal, every 1% drop in ad revenue currently subtracts 4% from earnings per share, Barclays says.

This explains a so-so reaction in the ITV share price to this prospect. This should make executives think. Shareholders, like fickle spectators, will reconsider their commitment if they don’t like what they see.