Ulster Television (UTV) is suffering from an embarrassment of riches. And this "embarrassment" is set to become more acute.
The big question is what to do with this surplus cash. UTV's latest balance sheet, published last week, showed cash of £18.3 million sterling, as at June 30th, 1998, compared with shareholders' funds of £18.1 million. That means that its net assets per share (35p sterling) are entirely backed by cash. But this cash pile is likely to be boosted further. Early next year UTV is likely to sell its remaining shares in Societe Europeanne des Satellites (SES) which was floated on the Luxembourg Stock Exchange in July. UTV gave a commitment to keep that investment, valued at only £0.8 million in its balance sheet, for six months. But there will be a substantial premium on that. Based on the SES share price there should be a capital profit of some £13 million. That, and retained profits this year, should bring the cash up to some £33 million, giving the shares a net asset backing of 63p.
With the historically low interest rate regime, and the prospect that the next move in British rates will be downwards, it makes little sense keeping cash. Interest receipts, for example, accounted for just 22 per cent of the group's first half pre-tax profit but the cash generated a return of only 5.3 per cent. That contrasts with 26.5 per cent return UTV gets from its operating gross assets.
UTV has promised its shareholders that a number of options are being explored including the payment of a special dividend, or a buy-back of shares, but no decision has been made. Nor will one be made until a decision is made on the sale of its investment in SES, and until a decision is made on the new licence terms.
UTV expects a decision on its application to the Independent Television Commission (ITC) for an extended 10 years before the end of the year. The costs of the new licence will be based on projections submitted by UTV and will be in two parts. First, ITC sets a percentage, ranging from zero to 15 per cent, on advertising and sponsorship, known as the qualifying revenue (PQR), to be paid on an annual basis. Second, there is an additional annual cash payment.
The terms set by the ITC are not negotiable. But if UTV does not accept the terms it will have the option of re-applying for an extended licence from either the year 2000 or 2001. UTV paid £1.13 million for the licence in 1997. There was no PQR and the licence was based on its cash flow. A payment of this order would not adversely impact on UTV but a high payment, for example 10 per cent on revenue, could cut its television operating profits in half. That appears to be remote as the British 1996 Broadcasting Act prohibits any changes to the existing arrangement for the "small" ITV companies, which could reasonably be held to jeopardise the capacity of any individual licensee to fulfil the quality and range of its regional programming service. The arrangements are very beneficial to UTV. UTV shareholders have already got a special dividend; £13.1 million was paid in July, 1996.
But UTV is facing more competition which could impact on its profitability. The launch of TV3 is bound to hit its advertising revenue. And RTE which has been prevented from using Northern Ireland's cable network, because of a copyright dispute with UTV, will eventually gain admittance. That will provide further competitive pressures in its own home base. The increased competition has led to the escalation in the rental of products (films, for example). Rental costs, however, will have less impact on UTV than on RTE (and TV3) as it gets most of its product from the ITV network. Indeed, UTV has renegotiated a similar deal with that network until 2005. Also UTV should gain an extra stream of income when it launches a digital channel next May. That, however, may be a slow developer as viewers change from the present analogue system, but the investment of some £0.5 million, will be miniscule for the cash-rich UTV.
UTV's shares at 168.5p sterling (52 week, high 267p, low 168p) are now well below the offer of 240p by Scottish Media which was rejected by the UTV board (Scottish subsequently sold its stake to Can West which has a 29.9 per cent interest in UTV. CanWest also has 45 per cent of TV3).
Because of the numerous permutations, it is not easy to make an estimate on earnings. However, make the following assumptions; a special dividend of £20 million (38p per share) is paid to UTV shareholders, pre-tax profit increases by 15 per cent increase in 1998 (the growth was 24 per cent in the first half), a 10 per cent increase is made in the licence fee (UTV hopes to have unchanged payments as it moves to digital) and the tax charge is at 30 per cent. Then the shares, ex a payout, are on a prospective p/e of some 11. That appears to be at an unwarranted discount to the sector.
