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Carlton and Granada downgraded despite optimism

LONDON - ITV companies Carlton Communications and Granada have suffered a credit downgrade by investment bank Morgan Stanley, despite reporting optimistic advertising forecasts in their full-year results earlier this week.

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Shares in the two firms, which are in the early stages of preparing for their £2.6bn merger, were marked down by Morgan Stanley's media research team to "underweight" from "equal weight". This is said to be a recommendation to sell the shares.

Morgan Stanley made the downgrade on the basis of statements about the state of advertising revenues in the run-up to Christmas and the outlook for the new year.

In a research note, the bank said: "The overall growth trend that ITV had seen from May to December came to a halt in December. Meanwhile, visibility remains poor for advertising in 2003. Indications from a major buyer of TV airtime are that January will be negative for ITV."

Granada's executive chairman Charles Allen said ad revenues are up just 2% on last year for the three months to December 31. While revenues were up 10% in October, growth has slowed to 4% in November and revenues are forecast to be down 8% in December. However, December's figures are expected to rally with last-minute bookings in the final shopping days before Christmas.

Carlton also signalled that it was facing a challenging three months to December, but it also reported a rise in ad revenues across October and November.

The investment bank also referred to ITV's declining audience share.

"Furthermore, we believe that, despite the reinvestment in the schedule, advertisers may by loath to pay as large a premium as in the past, for a channel that seems to continue losing market share," the bank said.

Despite the downgrade, both companies shares rose sharply yesterday, Granada's by 7.6% and Carlton's by more than 8%. This morning, Carlton continued to rise, up 1% to 165p, but Granada dipped 0.28% to 95.5p.

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