Broadcasting offers traders the chance for a big challenge

UK BROADCAST media has seen its earnings growth increase by 50 per cent this year. This outperforms other areas of the sector that have experienced steady, if unspectacular, growth. With the sector rated as undervalued by Numis and the industry experiencing rapid changes, taking a punt on the prospects for one of the big players is ever more tempting.

Probably the most exciting of the set has to be BSkyB. The company impressively scooped up subscribers throughout the recession and smashed analyst expectations last Friday with pre-tax profit for July-September increasing 24 per cent to £230m. This saw the share price rise four basis points to 701.5p. But this success story is embroiled in a spectacular mergers and acquisitions (M&A) row.

The argument centres around Rupert Murdoch’s News Corporation’s bid for the remaining 60.9 per cent of BSkyB that it does not already own. This has generated enormous resistance from News Corporation’s rivals: an unusual alliance between Guardian Media Group, the BBC, Daily Mail and General Trust and Telegraph Media Group who argue that this would damage “plurality” in the British media. They argue that should News Corporation succeed its share of the sector will be too large. They have called on the Liberal Democrat business secretary Vince Cable to refer BSkyB to Ofcom in an attempt to block the takeover.

Taking a position will be challenging but potentially rewarding for the trader since as Sam Hart of Charles Stanley says: “BSkyB might experience a dip if they are referred, a bounce if they clear it.”

The events in the next few weeks will be difficult to predict since Cable will be torn between satisfying his party’s interests (firm opponents of the “Murdoch empire”) and supporting the coalition that is broadly supportive. David Cameron will also struggle: whose wrath does he fear most – the Tory-supporting News Corporation titles, or the Telegraph and Mail papers who are also Conservative backers?

The bid has other troubles too. News Corporation offered only 700p per share in June, which was firmly rejected by the board – far below the 800p most analysts are recommending. The profit success reported last week adds pressure to increase the offer. RBS’s report on BSkyB suggests that it thinks that BSkyB will get through the regulatory hurdles and think the real challenge presented to News Corporation is the price offered to the board. They recommend 735p per share for a good value offer.

The fate of ITV’s share price will also be interesting in the next quarter. The success of this often-troubled broadcaster is pinned to advertising. ITV’s advertising revenue seems to have recovered from its experience after the recession, which saw the share price dip 80 per cent in two years. Numis research says the balance sheet is now in better shape and that it has already achieved the 67p target Numis set it in late September. This could mean that ITV could see a further rise in its share price. Most stockbrokers have cautiously optimistic views giving it either an “add” or “hold” recommendation. Hart says that despite his long-term negative view on ITV he thinks that advertising revenue will give the share price a boost in the coming weeks.

There is also the possibility that ITV could start to steal viewers from its rivals when the effects of deficit reduction start to bite. As the cost of living increases due to rising taxes and inflation, people may move away from paid for television. Hart however suggests that deficit reduction may actually support BSkyB’s share price since many families may view a TV subscription as a cheaper form of entertainment for their family than going to restaurants and the cinema.

With so much opportunity for volatility from M&A and from the effects of deficit reduction, traders may find it difficult to resist taking a position on the major broadcasters. The challenge is not only deciphering the actions of the companies themselves but also the actions of the politicians.