- ITV shares soar after confirming talks to potentially sell its TV and advertising arm to Sky
- A sale would remove the weak part of ITV and sharpen the focus on the Studios production arm
- The Studios business could be worth a lot more than ITV’s current market value if it was a standalone entity
- Breaking up ITV could also make the Studios arm a hot takeover prospect
Dan Coatsworth, head of markets at AJ Bell, comments:
“The jewel in ITV’s crown has long been its production arm which makes TV shows for broadcast on its channels as well as licenced to third parties. This part of its business, called ITV Studios, was always seen as the most likely bit to receive a takeover offer.
“The fact the media and entertainment arm has attracted a suitor, rather than Studios, is a surprise. There was a lot of uncertainty over whether anyone would want to relieve ITV of this ball and chain, so to see interest from Sky is Christmas come early for management and shareholders.
“ITV’s media arm includes the TV channels and ITVX streaming service, both of which act as platforms to carry third party advertising. Linear TV viewing is in a slow decline, with households increasingly showing a preference to watch on-demand streaming services or YouTube.
“ITV has done a fantastic job of staying relevant with the ITVX platform, and it’s fair to say that has been a much bigger success than people thought when it originally launched. It’s given ITV some breathing space to figure out what the future of the group should be, and it was clear that a break-up could be the logical path to follow.
“Despite the success of ITVX, the media and entertainment arm has acted like an anchor on the group. ITV’s latest results show that advertisers these days prefer to run promotions on digital platforms and not traditional ‘live’ TV. This has created problems for the broadcaster and meant that the historical revenue generation engine has become lopsided.
“ITV has flourished with its production arm, churning out hit TV shows and dramas that have entertained millions of people around the world. Streaming platforms are screaming out for new content, and ITV Studios has been an important cog in the wheel. Many investors would prefer if ITV only consisted of the Studios arm, and the prospect of a separation has fired up the share price.
“The potential deal to sell the media arm to Sky looks like an ideal situation, as ITV gets rid of the weaker part of its business, and the one with less attractive growth prospects. The £1.6 billion mooted price is based on enterprise value which includes debt, but there are no details about how much borrowings would be allotted to the media division.
“ITV as a whole company was valued at £2.5 billion before the news broke, and there have been suggestions that the Studios arm could be worth more than that amount alone. If the split happens, ITV shareholders would be left owning a pureplay content production business which might attract a much higher valuation, even after today’s share price jump.
“A standalone ITV Studios business would be an instant takeover target itself. Netflix is an obvious buyer as it could obtain a rich library of content at the click of a finger, and a hub from which to generate more programmes to feed its platform. Not having the media and entertainment bit to worry about would mean potential suitors wouldn’t have to take on parts of the current business they don’t want.
“Liberty Global might be kicking itself at selling half of its stake in ITV only a few weeks ago. ITV’s share price is now much higher than the implied price at which Liberty Global went from a 10% to a 5% position.”
