Twins overvalued as crunch nears for ITV

IS TOO much telly bad for the eyesight? Investors certainly seem blind to what the ITV companies' failure to win new digital terrestrial licences implies for their share prices.

With the Government committed to turning off analogue TV during this decade, Carlton and Granada are set to lose control of their distribution network. They risk being reduced to mere content providers.

After the ITV Digital fiasco shareholders might welcome that. Granada and Carlton may no longer control their digital destiny, the argument runs, but they had anyway shown they were not to be trusted with it. Better to let them concentrate on a limited business they know how to manage.

But this is short-sighted. ITV is declining. Today's advertising recession masks the way a falling audience share threatens revenue for the long-term. Less control over distribution almost certainly means ITV is going to have to spend increasing amounts on programming, at the expense of profits.

And yet Carlton and Granada shares are still trading at fat valuations. Carlton's 2003 price-earnings ratio is 44, and Granada's is 30. Analysts' forecasts may just about support those valuations - but only on the assumption that advertising revenues grow faster than ITV's programming budget.

The relationship between revenues and costs is actually running in the opposite direction, and risks worsening. Even allowing Carlton a bid premium due to the eternal rumours about a takeover, the ITV twins are overvalued.

Short squeezes may prove a threat to bears

RECENT slides in stock markets may have gladdened the hearts of bear investors. But they should watch out.

Shorting shares - their stock in trade - is becoming riskier. In part, this is a fact of the game. Shorting, or selling shares one does not own in the hope of repurchasing them more cheaply later, carries an asymmetrical risk. Shares cannot fall below zero. As prices slump, potential profit on a short trade dwindles while the potential for loss does not.

But this is not the main worry for the short seller. The slump is encouraging authorities to try to prop up stock prices. Last week, Britain suspended the requirement on companies to report pension fund movements in the balance sheet, and Switzerland relaxed rules so that insurers would not have to sell equities to improve their solvency. Both moves were designed to ease pressure on share prices.

Specific stocks - often bears' favourites - are also being targeted. The French government has aired the possibility of nationalising both France Telecom and Vivendi - comments that pushed the stocks up and squeezed the short interest. Ericsson, another bears' favourite, rocketed when it was rumoured its major shareholder would underwrite a big rights issue.

There is a further risk in shorting. The stock market has been in free fall and a correction is probably overdue. There are signs of one developing in the telecoms and media sectors. This rally could be short-lived, but may still squeeze the shorts fiercely. Bears beware!