SMG, the media group that owns Scottish Television and Virgin Radio, predicted yesterday that the proposed £4 billion merger of Carlton and Granada would be blocked by the Competition Commission.

SMG, which claims to be in favour of the merger on the ground that it would create a stronger ITV, is more pessimistic about the deal than many industry experts, many of whom believe that Patricia Hewitt, Trade and Industry Secretary, will sanction the proposed merger if Carlton and Granada agree to sell their advertising sales houses.

SMG pointed out that it has some knowledge of the internal workings of Whitehall. Its chairman, Don Cruickshank, is a former director-general of Oftel, the telecoms regulator.

Regardless of the outcome of the deal, Andrew Flanagan, chief executive of SMG, insisted the group would be able to retain its independence.

Mr Flanagan was speaking as SMG reported a near halving of pre-tax profits in the first half from £10.5 million to £5.5 million, with revenues from continuing operations cut to £86 million from £91.9 million last time.

The company, whose interests include outdoor and cinema advertising as well as radio and television, blamed tough advertising markets as well as an increase in marketing spending intended to reverse a fall in listening at Virgin.

In line with several media groups, SMG expressed cautious optimism about the future of the advertising markets but declined to call the end of the recession.

Mr Flanagan said he was cautious because a few strong months in the second half of 2002 had turned out to be “a false dawn”.

The chief executive added that from the middle of August SMG had noted a pick-up across its media businesses and that this had continued to strengthen.

Until the trend is confirmed SMG has decided to pass on its interim dividend and decide on a dividend level at the end of the year.

The note of caution helped to push SMG shares down by 5 per cent, or 4½p, to 94½p.

Analysts are looking for a strong second half, boosted by events such as the rugby World Cup and a strong schedule of film releases.

SMG will also benefit from a return to normal marketing levels at Virgin and the fact that audience numbers have stabilised and are now said to be on the way up.

Analysts are expecting pre-tax profits for the full year to come close to £20 million.