View from City Road: LWT's defence arguments fail to convince

All Sir Christopher Bland's eloquence yesterday failed to conceal LWT's leaky defence.

The chairman's appeal to his shareholders to reject Granada's pounds 700m offer hinges on two assumptions - first, that they are better off investing in a 'pure' television company like LWT than in a conglomerate like Granada, and second, that LWT is big enough to compete in the brave new world opening up for the industry.

Neither argument holds water. The market is currently rating the two companies broadly in line. Why should it do that if television companies really were a better bet than conglomerates?

But, even if Granada's price- earnings multiple fell below that of television stocks, it would not have to look far for a solution. Low- rated ICI has already blazed that trail with the demerger of its highly-rated Zeneca drugs arm.

LWT's arguments about size are even more risible. Why did it spend so much time and money lobbying for a change in the television ownership rules if it did not believe the future lay in larger combinations? And why was it struggling to mate with Yorkshire Tyne-Tees until only a few weeks ago if - as it now claims - it has sufficient mass to compete in all important areas?

If the strategic arguments fail, the rest boils down to whether the price is right. Sir Christopher argues that the re-ratings of television stocks which have taken place of late reflects a fundamental reappraisal of the media sector which will be sustained regardless of predatory interest.

That must be doubtful. Admittedly US media stocks have undergone what looks like a long-term re-rating. But many of those companies are very different creatures. They have a firm asset base in their film and television libraries or in their dominant network positions.

ITV groups such as LWT, Anglia, and HTV are short-life franchises.

An investment in them is a punt on the amount of advertising revenue they can generate before their licences expire in 2002.

In the absence of Granada, LWT's share price will probably depend on the existence of alternative predators - and they are fewer on the ground than is commonly assumed.

Despite its much higher-than- expected profit forecast of pounds 43m - the sort of surprise that is not uncommon in contested takeovers - it is hard to see opportunities for strong earnings growth at LWT. The company is a victim of its own success. Many of the possibilities for greater efficiencies have already been exploited.

The ball is now in Granada's court. Tomorrow it will almost certainly extend the period for acceptances for another couple of weeks. It looks unlikely to sweeten its bid significantly.

Investors should use the closing stages of this bid as an opportunity to cash in on the television sector close to its probable peak. But, as we argued when the bid was made, there are reasons for fighting shy of Granada's shares too.