ITV gains leverage after Virgin's fight with Auntie Beeb

UKTV, which is 50% owned by the BBC, will withdraw its channels from broadcaster Virgin Media on Saturday after failing to agree on retransmission fees, which saw ITV shares perk up on hopes that it could increase its own fees.

Virgin Media, which also in negotiations with ITV over retransmission rights, said the BBC had a “broken business model” after talks collapsed with UKTV, which is jointly owned by US cable network Discovery.

The BBC had been offering to renew the broadcast rights deal for to its UKTV channels but has continued to hold backs the video-on-demand rights to its programming, instead selling them to the likes of Netflix, which Virgin Media felt was no longer acceptable as viewers expect to be able to watch shows on demand.

“The problem is the BBC does not grant the UKTV digital rights with its TV shows which leaves it somewhat stranded as a linear dinosaur in an on-demand modern world,” said David Bouchier, Virgin Media’s chief digital entertainment officer.

“Part of a commitment to audiences has to be allowing them to watch what they want, when they want and that also means being able to watch those programmes on demand. From US studios to small programme-makers, that is how it is done. The BBC puts UKTV in a very difficult position and we have been unable to come to terms and will replace the channels.”

Analysts at Liberum said the row is "likely to bring the matter of retransmission fees back on the agenda" for ITV.

ITV is in negotiations with Virgin over re-transmission fees, with new chief executive Carolyn McCall trying to get Virgin to pay for ITV1 for the first time.

Liberum said McCall has taken a softer line than her predecessor over the issue but the UKTV dispute is "likely to give ITV leverage in its negotiations whatever the outcome - if the dispute gets resolved quickly, the likely reason is that Virgin has probably given more away in any deal with implications for the deal that ITV would strike".

They added that if the dispute is protracted, "then Virgin is unlikely to want to lose more channels, which would increase the risk of subscriber churn".

Liberum estimates ITV could gain up to £140m in retransmission fees for ITV1 from a deal with both Sky and Virgin, with Virgin representing around £40m of that, representing close to a 5% full year uplift to consensus forecasts.

RESULTS INCOMING

ITV will next Wednesday publish interims for the six months to end June, which follow an encouraging first quarter trading update that flagged a positive start to the year with group revenue up 5% and net advertising revenue ahead 1%. McCall expects first-half NAR growth of 2%.

On the back of the World Cup the company will provide more details on how much of an impact it made to TV ad sales up until the end of the period, most of the knock-out stages including England's unexpected progress into the semi-finals will fall in the broadcaster's third quarter.

The market is expecting first half points revenue of £1.5bn, earnings per share of 7.1p and a dividend of 27p per share, according to the Bloomberg consensus.

The company's content production business, ITV Studios, delivered a strong performance with a "solid slate of new and returning programmes internationally”.

Broker Shore Capital hoped to see confirmation that this momentum has been maintained or possibly accelerated, given the World Cup impact, as well as for an update on content sales and evidence of progress in driving digital revenues.

More importantly, analysts look forward to hearing the conclusions of McCall’s “strategic refresh” – and particularly how she plans to accelerate growth in digital and content revenues both organically and through acquisitions.

ShoreCap reiterated its 'buy' rating on the shares, helped by an anticipated reenergising by McCall, regarding the group’s stock current valuation at p/e ratios at 11 and 10.8 times forward earnings as "undemanding".