The $4 billion ITV franchise sweeps got off to a false start last week when the regulating Independent Television Commission postponed the advertisement of new regional tv licenses.

The ITC originally intended to place ads at the end of January, closing applications at the end of April. Winners are to be announced in October.

The delay highlights the uncertainty that overshadows the bidding process. According to Larry Chrisfield, partner in the media division of leading accountancy firm Ernst & Young, even the applicants who already have declared themselves – Virgin, the MAI group and Polygram among them – are likely to have done only the most cursory calculations on how high to pitch their bids.

Crucial issues undecided

ITC said the delay, expected to be no more than a few days, was necessary because the Home Office had not yet ruled on some crucial aspects of ownership provisions. Also awaited is a decision from the Office of Fair Trading on the acceptability of proposed networking arrangements between the regional ITV stations – how much programming each station provides to the network and at what price.

Although recent broadcasting legislation allows one group to own two franchises, the Home Office said it would not permit two large regions to be controlled by the same group. It also suggested that adjacent franchises could not be commonly owned.

However, the Home Office has yet to rule on what it considers a “large” or “small” franchise (at issue is how to categorize some of the midsize franchises). In addition, it’s still dithering over whether its original ban on ownership of adjacent franchises should stand.

A spokesman for the ITC said the provision for networking and ownership had to be included in the document of bidding procedure that applicants will be sent when they reply to the advertisement. “They can’t apply for a franchise without it and we can’t send it to them until we have word from the Home Office and the OFT on these two outstanding matters.”

Ownership, networking

Would-be applicants for Channel 3 franchises cannot put a value on their cash bids until the questions of ownership and networking are resolved.

Applicants are required only to put up a cash bid for the first year of the 10-year franchises, to begin in 1993. Subsequent annual payments will be adjusted in line with inflation. This makes at least one aspect of evaluating the worth of franchises – that of predicting inflation rates to the year 2003 – a lot easier.

It is clear that the detailed regulations now attached to the application process will guarantee that serious bidders will enter the race much more evenly matched than had once been imagined. Serious bidders will ensure that they meet the quality threshold requirements and all will put together business plans that are vetted and approved by recognized auditors such as Ernst & Young, Peat Marwick and Arthur Andersen. In addition, all of these business plans will be based on similar calculations as to economic growth, consumer spending and advertising revenues over the next 10 years.

While there may be differences in the amount of regional programming in the proposed schedules of this or that bidder, all will offer a program mix that looks much like the fare offered by the incumbents, since this has been set as a benchmark by the ITC.

The ITC doubtless will take into account the caliber and reputation of the execs associated with each application, and it will look hard at the sources of programs for those applicants who do not intend to have production capability of their own.

But the ITC’s principal criterion of selection is going to be the cash bid. The motto is, “Who bids highest wins.”

However, according to David Rumble, media analyst at PA Consulting, the spread between high and low bids in any area is likely to be small, maybe as little as £ 1 million ($1.9 million) for the first year of a big franchise.

Rumble notes that regulations requiring franchisees to pay an annual levy based on gross revenues – 15% in the case of the breakfast tv franchise, 11% for the five big regional franchises, 7% for Yorkshire and the east of England, and 2% for Wales, central Scotland and the northeast – have substantially reduced the probable range of bids.

But just how much are applicants going to bid?

The key element in the bidders’ calculations is their estimate of net advertising revenue over the lifetime of the franchise. Given the recession and forecasts of a downturn in tv advertising over the next two years, it is likely that these projections will be much more conservative than they would have been two or three years ago. Competition from other media, especially satellite tv, could reduce expectations further.

Rumble’s early calculations – made before the levies on revenues were fixed – suggested a price ticket for all 16 franchises over 10 years of about £ 2 billion ($3.8 billion), which he broke down according to the proportion of current global revenues accounted for by each area.

Thus, the northwest, midlands, south, London weekend and London weekday franchises could have attracted 10-year bids in the range of £ 240 million to £ 360 million ($480 million to $720 million); Yorkshire, central Scotland, the east of England, and Wales and the west could have been valued at £ 105 million to £ 170 million ($200 million to $340 million); and the breakfast franchise and the northeast at £75 million to £ 95 million ($150 million to $190 million).

In Rumble’s view, it is possible that the smaller franchise areas, northern Scotland, the Borders, the Channel Isles and the southwest, may attract no bids.

Rumble’s calculations are similar to other figures mooted in London. He warns, however, that the increasingly gloomy economic forecasts could lower the bids, and all the estimates have to be reduced to take account of the levy provisions.

Most favored bidders are the incumbent franchise-holders, who have the clearest insight into how costs can be squeezed and profit margins maximized.

To date, there have been six confirmed bidders for the franchises. They are: Richard Branson’s Virgin Group (possibly in league with Westinghouse); MAI, a financial services and ad group (supported by Michael Palin); record giant Polygram with indie producers Palace, Working Title and Mentorn; Associated Press (which is limited to a 20% stake in any tv franchise); Michael Green’s Carlton Communications (which owns Technicolor); and Harvey Goldsmith’s pop promo and tv company Allied Communications.

Some others likely to join consortia mounting bids include: Andrew Lloyd Webber’s Really Useful Group; Chrysalis Group; facilities firm Trilion; Media Ventures, a U.S.-backed venture capital group; Peter Orton’s HIT Communications distrib (possibly with oil services and cable group Flextech); Alan McKeown’s SelecTV; merchant bank Hambros; and The Daily Telegraph (owned by Canadian Conrad Black).

European hopefuls might include Luxembourg’s CLT, Silvio Berlusconi Communications, Italian media group Rizzoli Corriere della Sera, France’s TF-1, French publisher Hachette and Germany’s Bertelsmann.

Competition is likely to be stiffest for the two London franchises (currently controlled by Thames and LWT), southern England (TVS) and the national franchise for ITV’s wake-up service (TV-am). Some analysts predict TV-am could be challenged by as many as six bidders, some of them backed by U.S. media groups.

David Murrell of accountancy firm Peat Marwick McLintock is sticking with his prediction that about 40 consortia will vie for franchises, including the 16 incumbents. But one media analyst predicted there would be fewer than 10 new contenders.

One element that could determine the final number of bidders is a perceived shortage of qualified chief executives. Industry scuttlebutt is that Michael Grade (head of Channel 4) was offered about £ 1 million ($1.9 million) to head the Carlton Communications bid (after former tv chief Bob Phillis exited Carlton to head up news organization ITN). He hasn’t yet bitten.

But with so much uncertainty in the air about the bidding process itself, and about ad projections, some potential players may yet decide to hold off until 1994, when takeovers of tv companies on the open market will be allowed. By that time, some predict, the auction winners will have found they overbid and could be looking to sell out.

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