Channel 4 faces the fight of its life: in the next six weeks it will know whether it is likely to be privatised, forced to accept huge cuts, or bailed out, possibly by the unlikely means of a merger with part of the BBC.

The Times disclosed this week that ministers were seriously considering a merger between Channel 4 and the BBC’s commercial arm – an idea winning some support as an alternative to handing over £100 million a year from the £3.4 billion BBC licence fee.

The notion is hard to accept at first because it would mean that Channel 4 would be propped up by the sale of BBC magazines, DVDs and international programmes. But it is emerging as a least-worst solution to bailing out the broadcaster, which, according to best estimates, will need an extra £100 million a year to survive from about 2012.

Ofcom, the regulator, believes that without financial help, “overnight Channel 4 News and Dispatches would disappear” to make way for popular reality shows and light entertainment. Privatisation is seen as unattractive alternative because, if the Government sold off Channel 4, which earned £1.6 million last year, it would raise relatively little.

It is worth about £500 million on Whitehall estimates. The high figure relative to profits is justified by Channel 4’s uniqueness and because most of the interested buyers would be other broadcasters that could generate synergies. A tie-up with RTL-owned Five could generate savings of £30 million a year.

By instinct, Labour does not favour a selloff; indeed, the party promised not to sell Channel 4 in its 2005 election manifesto. Ed Richards, the Ofcom chief executive, who used to advise Tony Blair on media policy, has repeatedly warned that hidden subsidies for high quality, low rating programmes are disappearing, while at the same time emphasising the need for “public service plurality” to compete with the BBC – now code for a stronger Channel 4.

Mr Richards will make recommendations to the Government in January, a couple of weeks before Lord Carter of Barnes, the Communications Minister, produces his Green Paper on Digital Britain. Lord Carter is a former chief executive of Ofcom, where Mr Richards was one of his deputies.

Not everyone accepts that Channel 4 deserves priority attention. A source at a rival broadcaster, who asked not to be named, said: “Ofcom seems stuck on this notion that Channel 4 has a problem, when the real funding problems are for kids’ programmes and regional news, neither of which Channel 4 does.”

The real difficulty for the broadcaster, is a hostile BBC, which wants to give up neither part of its licence fee nor any part of BBC Worldwide. So, on Thursday, to head off the threats, the BBC made a counter-proposal, under the heading, the “Power of Partnerships”. The Corporation offered to share technology and production facilities in a package it said could be worth £120 million a year to all broadcasters. Some of the proposals specifically aimed to provide help for Channel 4 through links to BBC Worldwide.

The BBC plan did not include the possibility of a merger, just the right “to publish a few magazines”, according to one insider – an offer valued at £10 million to £40 million annually by the BBC, and £10 million to £15 million by Channel 4.

The package seems doomed to failure. One well-placed observer inside the political and regulatory process said: “It’s welcome, of course, but it’s not enough.” Significantly, even the Conservatives agreed, with Jeremy Hunt, the Shadow Culture Secretary, saying: “It is hard to see how they [the BBC’s proposals] will resolve the big questions on the future of public service broadcasting.” So, for both Ofcom and the Government, it remains “very much an option” to “top-slice” the BBC licence fee. The growing view, however, is that it is not politically palatable to give Channel 4 cash, even if the effect on the licence fee would only be an extra £4. Thus, the idea of a merger with the highly profitable BBC Worldwide is moving up the agenda, with Channel 4 hiring NM Rothschild to help it. Last year, Worldwide made a profit of £112.5 million.

A “4 Worldwide” merger might be unpopular in the BBC, which asks why it should allow another organisation to profit from, for example, Doctor Who DVDs and merchandise. But there are advantages, with a new company being able to diversify without raising accusations of unfair competition that hit BBC Worldwide when it bought Lonely Planet.

John McVay, chief executive of Pact, the trade body that represents independent producers, said that giving Worldwide profits to Channel 4 would be “better than using taxpayers’ money, and it is coherent to use cash raised from selling UK programmes abroad to benefit UK broadcasters broadly”.

Top-slicing remains the nuclear option, but its main value is in wringing more concessions from the BBC. As pressure on the Corporation mounts, a Channel 4-Worldwide tie-up looks increasingly likely to emerge.

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