ITV: gearing up for more drama might put off shareholders

Channel hopping suits bored couch potatoes. But it does no favours for a broadcaster such as ITV. Britain’s leading commercial television company relies on cyclical advertising revenue for nearly half of its top line. Buying up production companies is meant to smooth out any volatility from viewer fickleness.

ITV said on Friday that its next acquisition could be All3Media, owned by Warner Bros Discovery 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. Reportedly worth some £1bn, All3Media had around £750mn of revenues back in 2020 notes Citi. Even if these figures are sketchy, it would probably be ITV’s largest production company purchase so far. Studios, so far growing steadily over the years, would then lead on revenue contribution.

All3Media has a considerable back library of locally popular shows including Midsomer Murders as well as multi-country, repeatable formats such as Gogglebox. All3Media’s 30,000 hours of library is sizeable, a third of ITV’s. All this should mean more recurrent revenue, which the market prefers, and less cyclicality to ITV’s earnings.

But can ITV afford a chunky cash outlay? ITV should generate around £250-300mn of free cash flow, going forward. A healthy balance sheet — net debt roughly equals forward ebitda — leaves headroom to use debt financing. But much of free cash flow goes to dividends. And even if ITV could use the steadier income from All3Media, it is a little early to dismiss the broadcaster’s sensitivity to shifts in advertising spend. All else being equal, every 1 per cent drop in ad revenues currently takes 4 per cent from earnings per share, says Barclays.

That explains a so-so reaction in the ITV share price to this prospect. That should give executives pause for thought. Shareholders, like fickle viewers, will rethink their commitment if they do not like what they see.