LONDON - Amid a brutal advertising downturn, the UK's main free to air commercial broadcaster ITV is seeking options to shore up its balance sheet before debt repayments come due in 2011.
But apart from a much-touted rights issue, which some bankers expect will meet with little success, an easing of rules to allow the troubled broadcaster to charge more for advertising when the economy begins to recover looks like one of the few solutions.
Others options that could be put in the mix are more asset sales, changes to the covenants governing the repayment of its loan and a fresh debt deal.
The most likely outcome is a recapitalization that could involve a debt solution as well as equity, one banker said.
Two other senior banking sources said that although a rights issue remains a key option, ITV was not about to push the button on a deal.
I don't think (a rights issue) is management's first choice, analyst Lorna Tilbian of Numis told Reuters. I think they would rather make disposals and get regulatory easing before coming to market.
ITV has been promising a turnaround based on better programming and a relaxation of the rules governing how much it can charge for advertising since Executive Chairman Michael Grade took over the top job at the end of 2006.
Asked whether ITV would consider a rights issue, Grade said earlier this month it would keep all options open but declined to comment further. A spokeswoman declined to comment further on the subject on Wednesday.
DEBT REPAYMENT LOOMS
Like the rest of the UK broadcasting industry, ITV has been severely damaged in the last year through a downturn in advertising which has compounded an exodus of viewers from traditional media to the Internet.
The company has suspended its dividend and cut jobs, but still faces a possible funding gap as early as 2011 - when a 500 million euro bond and 450 million loan mature.
ITV also has three sterling-denominated bonds worth 685 million pounds maturing between 2013 and 2017.
The Office of Fair Trading, the UK's consumer and competition authority, supports the idea that advertising rules under the so-called Contract Rights Renewal system should be relaxed, allowing broadcasters to charge higher fees.
Such a move would help ITV to flourish when the economy improves and advertising markets stabilize.
The Contract Rights Renewal system was introduced in 2003, when Carlton and Granada merged to form ITV. It contains a clause allowing advertisers to pay less if the broadcaster loses audience, as has been the case in recent years with ITV.
ITV might well think twice before asking shareholders for more money, with analysts divided about how an ITV rights issue would be received by investors.
Shareholders are sceptical about ITV's long-term prospects. I'd be surprised if they could execute a deal now, said Sam Hart of Charles Stanley. He added that the company would be unlikely to announce a rights issue before its interim results for the period ending June 30.
Others argue that ITV should launch a capital hike soon before it gets harder to raise money. Despite the recent rally, equity markets are still volatile and, with a heavy calendar of rights issues lining up, investors will not be able to support every deal.
Financial flexibility would also enable ITV to invest through the downturn which would allow it to better capitalise on any future recovery, UBS said in a recent report.
ITV has lined up potential disposals as another way to raise funds, but bankers say the businesses are fairly small and won't make much of an impact on its position.
The broadcaster is seeking to dispose of the social network Friends Reunited and might also look to sell SDN, the successful Freeview multiplex operator business.
The size of these assets is not life transforming, one media banker said. He added that markets have declined significantly since ITV bought the assets, meaning that it would have to accept a lower price if it could find a buyer.
Bankers say that ITV is unlikely to become a target itself, despite years of speculation about takeover interest in the company. They say ITV's pensions deficit of around 178 million pounds, will act as a deterant to potential acquirers for the foreseeable future.
Other broadcasters are also feeling the pressure.
Publicly owned but advertising-funded Channel 4 has asked the British government for help, requesting a change in existing rules to allow it to partner with the commercial arm of the BBC. In response, Channel 5, owned by RTL AUDK.LU has said it would like to merge with Channel 4 - although that proposal has so far been rejected.
(Editing by Richard Hubbard)