ITV has confirmed that it is holding talks over a possible sale of its media and entertainment (M&E) broadcasting business to Sky owner Comcast in what is seen as signalling a consolidation of the commercial broadcast sector.

The proposed deal would have an enterprise value of £1.6 billion and involves the broadcaster’s TV channels and streaming service ITVX.

ITV, which broadcasts across England, Wales and the Scottish Borders, said there is no certainty over the terms or outcome of a potential sale of the division.

However, it would not include ITV Studios, the production arm behind hit shows like I’m A Celebrity…Get Me Out of Here and the acclaimed drama Mr Bates vs The Post Office.

Analysts are expecting the terrestrial players to restructure as part of a response to the big streaming services. US giant Comcast believes that bringing together Sky’s pay-TV business with ITV’s free-to-air channels, will create a “UK commercial streaming champion” capable of going head-to-head with likes of Apple, Disney and Netflix.

Guarantees over the security of future supply from ITV Studios is thought to be part of the discussions.  There is not thought to be any plan to integrate ITV content into Sky’s subscription tiers.

A combined entity would control more than 70% of the UK’s TV advertising market, according to one source, so any tie-up would need regulatory approval.

Comcast owns a range of media assets including Universal Studios. It bought Sky from Rupert Murdoch for £30bn in 2018.

ITV said it noted recent press speculation and “confirms that it is in preliminary discussions regarding a possible sale of its M&E business to Sky for an enterprise value of £1.6bn.

“There can be no certainty as to the terms upon which any potential sale may be agreed or whether any transaction will take place. A further announcement will be made in due course if appropriate.”

The talks come at a time of falling advertising revenues. ITV recently said it expected advertising revenues, which still account for most of its income, to fall by 9% in the key fourth-quarter advertising period in the run-up to Christmas.

Market reaction

Dan Coatsworth, head of markets at AJ Bell said: “Despite the success of ITVX, the media and entertainment arm has acted like an anchor on the group. ITV’s latest results show that advertisers these days prefer to run promotions on digital platforms and not traditional ‘live’ TV. This has created problems for the broadcaster and meant that the historical revenue generation engine has become lopsided.

“Streaming platforms are screaming out for new content, and ITV Studios has been an important cog in the wheel. Many investors would prefer if ITV only consisted of the Studios arm, and the prospect of a separation has fired up the share price.

“The potential deal to sell the media arm to Sky looks like an ideal situation, as ITV gets rid of the weaker part of its business, and the one with less attractive growth prospects.

“ITV as a whole company was valued at £2.5 billion before the news broke, and there have been suggestions that the Studios arm could be worth more than that amount alone. If the split happens, ITV shareholders would be left owning a pureplay content production business which might attract a much higher valuation, even after today’s share price jump.

“A standalone ITV Studios business would be an instant takeover target itself. Netflix is an obvious buyer as it could obtain a rich library of content at the click of a finger, and a hub from which to generate more programmes to feed its platform.

“Not having the media and entertainment bit to worry about would mean potential suitors wouldn’t have to take on parts of the current business they don’t want.”

STV thrown into the mix

STV will be looking on with a little nervousness as it considers its own structural change as a minnow in a sector being consolidated into fewer players.

It relies on ITV for a significant portion of a declining network advertising market and the majority of the most popular and lucrative programmes shown by STV come from ITV1.

The Glasgow broadcaster has admitted to pressures facing traditional broadcast and is currently in the throes of cutting 60 jobs to save £3 million.

It is launching a radio station early in the new year, having identified what it says is a gap in the market, though critics question whether it will bring the returns it forecasts.

Ultimately, STV faces the same battles with streaming services as ITV and if the bigger company is struggling to retain its independence it may raise similar questions on the Clyde.