Channel 4: privatisation would leave most acquirers tuning out

The UK government plans to privatise Channel 4. It faces two obstacles: achieving the mooted £1bn price tag and finding a buyer. Appropriately, a broadcaster with a history of offbeat programming would make for an offbeat acquisition target.

At an enterprise value of one times sales, that nebulous £1bn does not look especially challenging. Channel 4, a broadcaster with public service commitments, more or less breaks even over the years. Apply rival ITV’s margins of 20-23 per cent and you get a comparable multiple of 4-5 times ebitda.

ITV, the nearest industry comparator, is at a very different stage in its life cycle. It is shovelling investment into streaming which depresses earnings forecasts and the share price. However, it also has its own studios and owns significant intellectual property.

What applies to both broadcasters is that fewer people are watching TV while a fragile economy does not support big ad budgets. This is a horribly regulated industry. The ad regulator curbs promotion of all things considered bad — cigarettes, alcohol and, as of the year-end, junk food.

Even allowing for Channel 4’s tendency to hoard cash, only the boldest private equity buyers would be interested, as executives at its own small buyout arm must realise.

Assume a financial buyer covered two-thirds of the purchase price with debt and held Channel 4 for five years of flatlining revenues. Assume it raised Channel 4’s margins a couple of percentage points above ITV and achieved a slightly bumped-up exit multiple. That would give an annualised return of 13 per cent, barely worth the effort.

A trade buyer could eliminate some duplicated costs, say 5-15 per cent of the total. Domestic broadcasters might see Channel 4 as a defensive play but are likely to be ruled out on antitrust grounds. ITV’s share of the ad market would swell from 43 per cent to 60 per cent; “share of voice” rules on media plurality are a further obstacle.

International buyers — Discovery, say, or Viacom, which owns the UK’s Channel 5 — might hope to pick up synergies by routing existing content through Channel Four.

Privatisation will take a long time, regardless of the buyer. The presale rejig would need to set aside such strictures as a ban on programme ownership. The government could be on the hook for some liabilities, as with the privatisation of Royal Mail in 2013. Expect more tuning out than tuning in.