Allen explains ITV's logic in buying Friends Reunited

ITV laid out the strategic case for acquiring Friends Reunited yesterday after sealing a £175m takeover whose logic has been questioned by shareholders and analysts.

Charles Allen, chief executive of ITV, said the deal reduced the company's dependence on its ITV1 channel - the source of 70% of ITV revenues - and fitted the strategy of opening new revenue streams for the UK's largest commercial terrestrial broadcaster.

Friends Reunited, the brainchild of Julie and Steve Pankhurst, helps its 15 million UK members track down old school friends and trace their family tree, as well as providing a dating site, chat rooms and a jobs board. About 80% of its revenue - expected to reach £12.4m this year - is generated by its 1 million subscribers.

The news came as ITV1 celebrated its highest peak time audience share in four years last week, with shows such as X-Factor and I'm a Celebrity boosting ratings. However, the main channel's audience share is likely to decline by about 5% this year to 21.5% as the growth of digital TV continues to draw away viewers from established terrestrial stations.

Mr Allen said some shareholders needed reassurances, following reports that a number of investors voiced doubts over the combination of a 50-year-old broadcaster with a five-year old internet service. "There were no figures in the public domain and a number of shareholders thought it made no profits at all ... We have had conversations with a number of shareholders and now they understand where it sits in our strategy," he said.

Friends Reunited will retain its brand and will not merge with the ITV.com site or the recently launched ITV Local portal, which offers weather, news and entertainment programming to broadband users in Hastings and Brighton. However, ITV plans to bring the three separate management teams together and cross-promote the sites. Friends Reunited is expected to generate programming ideas, with high hopes for the Genes Reunited site, which allows amateur genealogists to trace their roots.

"Our business is about creating and building content and exploiting that content through a number of ways, through broadcast but also through broadband and mobile," said Mr Allen.

Jeff Henry, head of ITV's newly formed consumer division, said the deal should be seen in the context of the "enormous change" happening to the broadcasting industry. "Broadband is reaching a critical mass in this country, £1bn a year is being spent on online advertising. This is about allowing people to enjoy ITV content on various different platforms wherever they want to consume it," he said.

ITV will pay Friend Reunited's owners, who include the Pankhursts with 25% of the company, £120m in cash and shares up front. The payment will rise by £55m in 2009 if the business meets profit-based performance targets. Friends Reunited is expected to make revenues of £12.4m this year, with earnings before interest, tax, depreciation and amortisation of £6.6m.