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On the money

Launching a private equity bid for ITV is not as simple as it might appear.

The business is not a master of its own destiny for two reasons. First, as a
condition of the merger of Carlton and Granada to create ITV, the company
operates an agreement known as contract rights renewal, which restricts its
ability to increase the cost of its advertising.

Second, the regulator Ofcom, acting for government, demands a certain amount
of original programming. So the regulator restricts management’s ability to grow
revenue and cut costs.

For a supposedly free market capitalist country this happens a great deal.
Think of all those companies under the control of a regulator who can impose
rules that might affect profitability. These include rail, water, gas,
electricity and telecoms.

Next, think of those companies that may not be regulated but have the bulk of
UK pricing controlled or set by the state. The regulated ones just mentioned
fall into this category, but so too does much of the pharmaceutical industry.

Next are companies that come under the auspices of the Financial Services
Authority. Most of banking and insurance is vulnerable to being told how much
capital to deploy, what compensation to pay, what social policies to support –
plus some outright price capping.

Category four brings in companies which derive much of their core value from
quasi-monopolies granted to them by a British government agency, and which the
state could also remove. This applies to broadcasting and airlines, and finally,
we ought to segregate those companies which get the majority of their revenue
from the state – notably the UK defence industry.

All these companies, when totalled up, account for two thirds of the Footsie
valuation. We are not as much of a free market as we like to pretend.

Anthony Hilton is finance editor of the Evening Standard

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