British TV companies to use innovative structured equity in merger

A new kind of convertible share that includes path-dependent optionality will be offered to investors as part of the merger plans of UK commercial television companies Granada and Carlton Communications.

As part of the deal, worth around £1 billion, existing Granada investors will receive one ordinary share in the merged entity and 7.225 pence for each Granada share held. In addition to receiving 1.9386 shares in the merged entity for each Carlton share held, existing Carlton investors will receive 0.1835 in convertibles shares per existing share, upon completion of the merger.

The convertible shares will convert into the merged entity's shares on January 1, 2006. Conversion is contingent on the merged entity’s closing share price trading above £1.40 on 60 out of the last 90 trading daysprior to January 1, 2006. This makes the share’s conversion option akin to a knock-out option where the closing price barrier is allowed to be breached a maximum of 30 times.

“This kind of path dependency is very, very, unusual,” one London-based equity-linked trader told RiskNews, speaking on condition of anonymity. “It’s like an exotic, one no-touch barrier option, but I’ve not seen anything exactly like this before,” he added. One benefit of the path-dependency could be to help discourage future attempts to takeover the merged entity.

Conversion is also dependent on the merged entity's earnings-per-share for the year ending September 2005 reaching at least 6.26 pence. An equity trader at another house said: “We only have incomplete information on the proposed issue, but is seems unique, and I don’t even want to begin to think about how you price it fairly.” RiskNews contacted the equity-linked research teams at several houses regarding the structure of the convertible shares; all declined to comment after receiving advice from their compliance officers.

The merger is subject to the two television companies gaining approval from UK commercial television regulator, the Independent Television Commission. An earlier attempt at merger was abandoned after information of the deal apparently leaked into the market back in February 2002. Consequently, both companies’ shares rocketed – ruining the intended economics of the deal.

Carlton and Granada shares closed in London yesterday at £1.34 and 76 pence, respectively.