Confirmation from ITV PLC (LSE:ITV) on Friday morning that it is in talks with Sky about the possible sale of its broadcast arm sent the shares surging and reignited speculation about a long-awaited break-up of the group.
Analysts said offloading the slower-growth Media & Entertainment division, as is being discussed, could create substantial value for shareholders, but warned of likely regulatory hurdles.
Comcast, Sky’s US parent, had earlier been reported to be in discussions to buy the unit from the FTSE 250 group for about $2 billion (£1.6 billion), an amount that was confirmed.
UBS analyst Adam Berlin, who has a 'sell' rating on the stock, said such a deal “could potentially create material value for ITV shareholders”.
His valuation, based on discounted future cash flow, values the division at £1.5 billion, close to the reported figure.
The UBS analyst estimated that if ITV used all the proceeds for share buybacks, it would lift earnings per share to around 10p, versus 7.7p in his current base-case forecasts.
It would imply the shares are trading on circa 7x EPS, while the only European listed studios peer, France's Banijay, trades on 9x.
"But there are reasons to be cautious," said Berlin, noting that no formal bid has been received and that “regulatory approval” would likely be needed, given Comcast’s ownership of Sky.
Moreover, ITV is UK's largest commercial public broadcaster and, said market analyst Neil Wilson at Saxo, regulators might "raise eyebrows" or more about Sky building such dominance in the UK TV ad market.
He said consolidation in the industry “has been a long time coming” as broadcasters face “the onslaught of US streaming giants”.
Dan Coatsworth at AJ Bell said the broadcaster may finally have found a buyer for “the ball and chain” part of its business, with the slower-growth media arm, which includes free-to-air channels and streaming platform ITVX, would leave the pureplay content production business of ITV Studios.
The Studios arm, which in recent months has produced programmes including The Reluctant Traveller for Apple TV, Love Island Games for Peacock in the US, Frauds for ITV and The Guest for BBC, has continued to perform strongly, helping offset weakness in traditional advertising in the past quarter and before.
It will become "an instant takeover target" itself, said Coatsworth, suggesting Netflix Inc (NASDAQ:NFLX) would be a potential buyer to obtain a rich library of content to feed its platform.
After being a 'strategic' shareholder in ITV for a decade, Liberty Global (NASDAQ:LBTYA) seemingly out of nowhere sold half of its 10% stake last month.
The Virgin Media owner "might be kicking itself", he added, especially as ITV’s share price is now higher than the implied price at which Liberty increased its position from 5% to 10% in July 2015, having first built a stake the year before.