Shares surge ahead of ITV merger ruling

Carlton and Granada among biggest risers as City awaits verdict from Hewitt today on £4bn tie-up

The Government will today give the regulatory verdict on the £4bn merger of Carlton and Granada, a deal that will shape the future of British television.

The City was betting yesterday that not only will the deal be cleared but that the conditions imposed, by the Department of Trade and Industry, will not be onerous. The merger will create a single ITV company for the first time, which many consider a pre-requisite for taking the fight to the BBC and BSkyB.

The anticipation of a favourable outcome sent shares in the two companies soaring yesterday, with Granada closing up 5 per cent at 103p and Carlton, the weaker company, gaining 9 per cent at 81.5p, as the shares closed in on the terms of the proposed merger.

The share price rises were driven by press stories over the weekend that predicted the merger would get through with only "behavioural" conditions attached to the deal. Speculation has centred on regulators going for the "roll-over" remedy, which would see the terms of current advertising contracts extended for a number of years, to prevent the merged company using its increased muscle to drive up ad rates.

Such an outcome would be seen as a personal triumph for Charles Allen, Granada's chairman. Granada put forward this solution to regulators in prolonged negotiations and the company argued that the alternative type of remedy, a structural solution, would undermine the rationale for the deal. As if in anticipation of having something to celebrate, Granada yesterday announced a 4.5 per cent pay increase for its staff.

One ITV insider said: 'Roll-over would be an amazing result for Charles. He's the person who pulled this up [as a remedy] and he's the one who would have pulled it off."

The DTI has been studying the Competition Commission report on the deal since the end of August. Patricia Hewitt, the Secretary of State for Trade and Industry, is expected to go along with the Competition Commission's recommendation on the transaction and make her announcement at 11am today.

Mr Allen's position is seen as being under severe pressure from shareholders. Analysts said that his personal standing would be hugely boosted by a favourable regulatory outcome.

As recently as last week, the City appeared to be split over whether the regulator would go for a behavioural or a structural solution. By yesterday, expectation had swung firmly behind the behavioural camp, an outcome that would be much better for the companies and their shareholders. Investors were dismissing the possibility, flagged up by competition lawyers, that the deal would be blocked outright. Together, Carlton and Granada would have 52 per cent of the television advertising market.

Matthew Walker, of Lehman Brothers, said: "The City is saying there is virtually zero chance of it being blocked. If it were blocked, it would be a massive shock."

If structural conditions were put on the deal, the most likely remedy is the divestment of both the sales houses of Carlton and Granada, an outcome that may make the companies walk away from the merger. Whether this is a deal-breaker would depend on the level of control that ITV would be allowed over the sales houses and what incentive structure is used.

Kingsley Wilson, an analyst at Investec, took a less optimistic view, predicting a 60 per cent chance of a structural remedy and he gave a behavioural solution a 30 per cent chance - rating an outright ban at 10 per cent.

"I've thought it would be structural for such a long time, I see no reason to change my opinion now," he said.