Carlton and Granada to merge

Granada and Carlton have struck a £2.5 billion deal to create a single giant ITV company.

The move comes in the face of a slump in ITV's audience share and the worst recession in advertising for 40 years. It also follows the collapse of the two companies' disastrous digital venture, ITV Digital, which cost them more than £1.1 billion.

The urge to merge has also been forced on ITV after it failed to recruit Dawn Airey, the highly successful chief of Channel 5 who defected to BSkyB last month.

The new company, which is almost certain to call itself ITV plc, will be chaired by Carlton's boss and founder Michael Green. Its chief executive will be Granada's chairman Charles Allen.

Only a month ago Granada ousted its chief executive Steve Morrison, a widely respected television producer who was seen as carrying the can for the failure of ITV Digital.

Carlton's chief executive Gerry Murphy is being widely tipped in the City to announce his departure to head the Woolworth retail chain, Kingfisher.

The average viewer won't notice any huge change after the merger. But in the longer term, the money saved from combining the two companies will allow money to be poured back into making better television.

Granada and Carlton, who both make TV as well as broadcasting it, want to direct more cash into ratingsgrabbing hits such as Cold Feet and Popstars... The Rivals, Tonight With Trevor McDonald and Coronation Street, which are the mainstay of the ITV schedule.

This means under-performing shows such as Crossroads and low-budget factual programmes could face the chop.

The announcement took the stock market by surprise and shares in both companies jumped sharply. The deal

still depends on being cleared by regulators, but both companies feel the Government's draft Communications Bill has effectively given them the green light to go ahead with the merger, first revealed in February. At that stage, the two companies were worth a combined £5billion, twice today's value.

Another result of the merger means that ITV chiefs are certain to be looking at cost savings. Carlton's troubled drama department will be a prime target after worrying reports about its performance.

In contrast, Granada, which is the more established programme maker, has a heritage of hit shows which is likely to remain relatively unscathed. Carlton, which is more of a " publisher broadcaster", has struggled to build up the same heritage as a programme maker.

Some of its bigger hits, including Peak Practice and Kavanagh QC, have now been discontinued, and it has also been associated with some poorly performing programmes such as Crossroads and Survivor.

Carlton spokesman John Rudowski said: "The merger will afford an opportunity to make some significant cost savings."

Media watchers believe that when the deal gets under way, viewers will enjoy better programmes. "They will have more money spent on them," says Paul Richards, an analyst with Numis Securities.

A merger will combine the production, distribution and back-office functions of the two companies, which could free between £40million and £60million. The hope of Granada and Carlton is that the new £ 2.5billion giant will find it easier to compete with global companies such as Disney and AOL Time Warner.