The government is hoping to cash-in on a £1bn-plus bidding battle by offering the chance to own a British broadcasting crown jewel – but Channel 4’s existing business model make it an unattractive prospect for many potential buyers.
Channel 4 was founded by Margaret Thatcher’s government 40 years ago to provide a culturally challenging alternative to the BBC and ITV. It is publicly-owned but commercially-funded.
Its existing public service broadcasting-led remit requires it to reinvest profits into new commissions and buying commercially unattractive – but culturally important – content such as news, current affairs, films and documentaries. This is the antithesis of a golden ticket for private equity investors, who want to cut costs and boost profit margins.
Channel 4 executives had instead presented an alternative plan to government called “The Next Episode” to avoid privatisation, based on the potential for a rapid increase in revenues from the broadcaster’s digital operations. This would have seen increased programme investment, a strategy to further boost the government’s regional “levelling up” agenda, and leverage more financial flexibility. Government sources insist Channel 4’s counter-proposals to privatisation were a non-starter and were not “serious”.
Instead, ministers insist a privatised Channel 4 can make a profit even while being required to retain many of its public service requirements, including a commitment to prime time news.
Analysts believe that a profit-hunting new owner would still be able to make hefty cuts to Channel 4’s programming budget, which would ultimately affect the quality of on-screen content, while fulfilling the letter of the law on public service broadcasting requirements. Any changes would be monitored by Ofcom but the government has recently appointed Michael Grade – a supporter of Channel 4 privatisation – to lead the board of the media regulator.
Channel 4 had an annual programming budget of about £660m a year before the pandemic, funding the likes of It’s A Sin and The Great British Bake Off. It currently has a profit margin of just 8% – about half the level of commercial peers across Europe.
Its rival Channel 5, which was acquired by the US giant Paramount in 2014, manages to fulfil its public service broadcasting obligations while spending just £240m annually.
Analysts at Ampere argue Channel 4’s programme budget could be cut by 40% or even 50% under a new profit-seeking ownership, with a knock-on effect of putting as many as 60 small production companies across the UK out of business.
“The big question is: what is it that is being bought?” asked one city source. “The government has to decide what it is selling. Is it essentially selling just a license to broadcast? How much will its remit change in reality?”
Even when making the case for privatising the channel, government sources have been happy to admit that Channel 4 is currently in a strong financial position. They argue instead that the broadcaster is a “depreciating asset” that is in “good shape at the moment but won’t be soon”, prompting an urgent need to sell.
Enders Analysis has said that Channel 4’s value could be anywhere between £600m and £1.5bn depending on how much freedom over its model a new owner is given. One of the first assets to go could be Channel 4’s distinctive headquarters in Victoria, London, which could be worth up to £100m. The broadcaster’s efforts to expand its physical presence in Leeds, Glasgow, and Bristol in recent years would probably be curtailed as an inefficient allocation of resources.
It is unlikely that a subscription-based streaming company such as Netflix would be interested in buying Channel 4. Instead, it is of most value to rival broadcasters – such as Sky, ITV, Discovery and Channel 5’s parent company, Paramount – none of which would want to see it fall into the clutches of the other. Another option could be a management buy-out that retained the current executive team.
Channel 4 derives more than 90% of its almost £1bn annual revenues from advertising and holds about a 28% share of the total UK TV ad market. Its rival ITV is the largest player, with a 45% share, and Sky Media, which also sells Channel 5’s ads, has about a 27% share.
“Ad sales consolidation is a major driver of this sale. Nobody can afford to lose: it’s like musical chairs,” said one former top TV executive. “ITV and Sky/Channel 5 are worried that they will lose pricing leverage because of a loss of scale. The government is setting it up to make sure everyone bids in a form of self defence, with wishful thinking in terms of [maintaining] remit delivery, which will get commercially conveniently diluted over time.”
Sky, ITV, Discovery and Paramount all declined to comment on whether they would be interested in a purchase – although there is little doubt that a large number of potential purchasers are running the numbers on whether they could make a profit from Channel 4.