Carlton-Granada take a break

Anthony Hilton12 April 2012

CARLTON has been a dysfunctional company for so long it is only natural that its takeover talks should unravel despite the overwhelming business logic of a deal with rival TV company Granada.

It and Granada have committed to develop ITV Digital as a nationwide terrestrial network. Neither can afford it. Between them, they have tossed almost £1bn into the ether, with nowhere near enough customers to be viable.

While BSkyB rolls ever onward, ITV Digital is so far from success that it would hurt even if its owners were doing well, let alone having to cope with a sharp drop in TV advertising. But they are in so deep they feel they have to keep going.

On the other hand, there are rules against them combining their land-based TV companies - Carlton, LWT, Granada, Yorkshire, Central, Anglia and the rest - into one gigantic ITV brand. The rules date from the early days of independent television and the proud achievement of local excellence destroyed by Margaret Thatcher's decision to auction the franchises a decade ago.

Once money, not quality became key, the arrival of satellite television so changed the game that the Government said a while ago it was willing to change the law. Meanwhile, the combined group could have been structured to get the cost-reducing benefits of the merger while parking the issue of legal ownership.

So the fact that the deal first leaked and was then called off looks like a personality problem - a dispute between Carlton's Michael Green and Granada's Charles Allen over who was going to be boss. The leak provides a pretext to walk away without loss of face.

But this is merely a commercial break, not the end of the show. Bertelsmann, the German media giant, looks to be tempted by Carlton, the weaker of the two. But if it moves, Granada will surely have to respond or risk becoming the junior partner in the Digital derby. It could scarcely relish having to match Bertelsmann's willingness to spend on the rollout. It would surely try to counterbid - and it might even be tempted to move first. There is a definite feeling of unfinished business here. The Carlton share price, which barely fell back today, says it all.

Case load

I DOUBT many will remember, but back in September 2000 BSkyB and NTL announced a five-year deal whereby the cable company would carry some of Sky's programmes. It gave NTL a discount to pass on to its customers and gave Sky guaranteed income,

The following month the Office of Fair Trading said it had some concerns and was going to take a look. Ten months later, in the following August, it listed these and Sky responded. I mention this today only because 18 months after the original announcement, and six months after Sky answered the questions, the OFT has decided to close the file on the case. It has not cleared the deal - presumably it cannot decide whether there is something it does not like - but it has decided to take no further action.

BSkyB's irritation is palpable. It complains how 'regulatory inertia' has impeded the development of its business, and it surely has a point. The OFT website says that it aspires to complete investigations of suspected anti-competitive practices within six months in three-quarters of the cases it handles. It says nothing about spinning something out for 18 months and then quietly letting the matter drop. If it were not a monopoly, it would never be allowed to get away with such sloppy case management.

Too many rules

REGULATION in this country is so much better than anywhere else in Europe that none of the Continental countries has bothered to copy it. Neither have the Asian governments, nor those in the Americas.

Uncomfortable though it may be to stress the point, a universal regulator covering all financial sectors and the wholesale and retail markets is seen by many as too unwieldy. Foreign regulators look at our Financial Services Authority but want proof that we can make it work before they copy it.

That proof is as far off as ever, not because the FSA is screwing things up, but because the cracks that were always present are beginning to show through the paper. Now we are a few years into the system it is not the 'under one roof' regulation of different sectors - banking, insurance derivatives - that causes the problems and makes many knowledgeable City people think the system is fatally flawed. Rather it is the combination of wholesale and retail regulation that is seen as untenable.

The nature of the regulated entities, the kind of business they do, the relative intelligence of the customer and the systemic and economic implications if the regulator gets it wrong make wholesale markets different. On the retail side, the Government doctrine that no one can be allowed to lose money brings a consumerist political dimension into play whenever there are problems that affect voters. Any retail market problem draws a knee-jerk response that there must be more regulation regardless of the effect of this when applied to wholesale markets.

This gulf will become even more apparent if the regulator follows up a hint buried in its review on polarisation that there may be a case for lighter regulation on standardised cheap and simple financial products aimed at the retail market. The reason this might happen is that the Government wants to encourage more saving and therefore needs mass market savings products.

But the industry cannot produce these profitably if the products are still subject to the full blast of expensive regulation. So the mass market rules get waived, and the wholesale/retail regulatory combination has even less logic.

Talent time

HEADHUNTERS say 30,000 jobs have been lost in the City since last September on top of a similar total before then as markets fell from the dotcom-inspired peak.

Even Goldman Sachs, which two years ago could boast that 40% of its employees had been with the firm for fewer than three years, is considering enforced redundancies. Elsewhere, investment bankers are quitting rather than switch from mergers and acquisitions, where there is no work, to corporate reconstruction, where there is lots to do but does not pay as well.

The challenge for these firms, and most others, is to work out how to hold on to the best talent. As Sir Martin Sorrell, chief of advertising giant WPP, pointed out the other day, shortage of production used to be the issue that taxed management, but now, as an example, we have the ability to produce 80m cars for a world with just 60m customers. The shortage of capacity today is not of manufacturing but talent - talent that must be wooed, incentivised, given early responsibility and hopefully not tossed in the bin at the first sign of an economic slowdown.

The lesson from previous financial downturns is that firms which hold on to their teams in lean times do much better in the upswings. There is no reason to believe it will be different this time - other than that those in charge are generally too young to remember the last slowdown so don't know what to do.

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