By Simon Bond

      Europe's leading media companies can expect further falls in their stock market valuations following the downgrading of their prospect by two of the major banks that handle investments in this sector. 
    The crisis in confidence follows the anticipated reduction in advertising spend and high exposure in the broadcast industry particularly.
   Dutch bank ABN AMRO has reduced the rating of 22 of its 32 media stocks. It has also reduced its global advertising growth forecast for 2001 by 1.3 percent to 5.5 per cent. 
   As a result, the bank is recommending that investors reduce their holdings in the sector. It says the key problems are the tumbling value of media companies internet assets and advertising sales growth is slowing.
     The bank puts much of the recent under-performance of the sector down to the fact that much of the convergence and internet value that has been applied to media companies has now evaporated.
   The removal of the "internet dividend" is going to impact on Europe's biggest media players, who have all heavily promoted web strategies in the last 12 months.
    These include Reuters, Pearson, Granada Media, British Sky Broadcasting, and Vivendi Universal who have all been downgraded by ABN AMRO.
   The bank favors the fortunes of professional publishers, such as Reed Elsevier and VNU best , while were most cautious about Bavarian TV giant ProSiebenSat.1 see, Silvio Berlusconi's Mediaset and UPC, the Dutch broadband cable giant whose stock price has tumbled to a fraction of its former value in the last few months.
   ABN AMRO's view is supported by Commerzbank who also published a bearish report on the prospects of Granada Media and Carlton Communications.
    Commerzbank is concerned about the prospects of ITV and pay-TV broadcaster ONdigital as pressure grows on advertising revenues. Both networks are jointly owned by Carlton and Granada Media, and Commerzbank says that the initial 3 per cent expected increase in advertising revenues for ITV for the 12 months to September 2001 is too optimistic. 
   At the same time the bank is also worried about the falling quality of pay-TV subscriptions and rising churn, or customer disconnection, rate at ONdigital.
    In contrast, equity strategists at Merrill Lynch published a more bullish report on the market and upgraded the European media sector to neutral from "underweight."
    It says that it expects shares to benefit from expected further interest rate cuts in the U.S. In particular, it lifted BSkyB to its buy list from its sell list.
    European media shares have fallen by an average of 27 percent since their peak in September last year.

-Simon Bond covers European media for Media Life, writing from outside of London.

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