Since the government cleared the way for commercial radio consolidation in the 2003 Communications Act, analysts have been waiting for radio companies to make a move. So it was no surprise when GWR and Capital admitted this week that they are in merger talks.
In a joint statement, the two sides said 'discussions are ongoing and may or may not lead to a transaction'. Despite lingering concerns about the ability of GWR chief executive Ralph Bernard and his Capital counterpart David Mansfield to share power, the view among analysts is that the deal is done.
Numis Securities analyst Lorna Tilbian calls it 'the radio equivalent of Carlton/Granada (forming ITV). It would create a major radio network with real scale.' A deal would create a £710m company with a 40% share of the radio advertising market. The two firms are in every key region from the Midlands southward. They are also players in the aggressive roll-out of digital radio.
Any merger, which would deliver £8m in savings, is likely to be referred to the competition authorities. But after Carlton's merger with Granada was waved through, it would be a surprise if GWR/Capital was blocked.
ITV makes £1.6bn in ad revenue compared with GWR/Capital's combined £150m, and ITV's share of the TV ad market is 50%.
That said, the Incorporated Society of British Advertisers (ISBA) is watching developments. In a statement, it said: 'Advertisers tend to be concerned over moves that reduce competition in media markets - 40% is a significant share in radio, an important medium for advertisers.'
There are two concerns. First, the merger could endanger competition within local markets. Though GWR and Capital are a good fit, they overlap in the East Midlands. It is likely that ISBA, the competition authorities and regulator Ofcom will expect the firm to divest Capital-owned 106 Century FM, which rivals GWR's Leicester Sound, Trent FM (Nottingham) and Ram FM (Derby).
Second, ISBA will want regulatory safeguards should the Capital/GWR merger spark a wave of consolidation. In this, it has agency support. Starcom Motive UK buying director Steve Parker says: 'There is concern in GWR/Capital having so much clout nationally and in London. With the group likely to further expand its influence through digital, the industry will be looking for controls on the way it drives its market advantage.'
But aren't advertisers protected by the fact that radio accounts for only 7% of the display advertising market? 'Not if your client wants to spend 80% of its budget on radio,' says Parker. 'The risk of consolidation is that it makes clients wary of over-reliance on a medium.'
Assuming the merger occurs, is there likely to be more consolidation?
'We think share prices are too high for US players such as Clear Channel, Viacom or Disney to get involved. For now, we're expecting intra-industry deals,' says Mediatique partner Mathew Horsman.
Initially, the spotlight is on Emap (which owns Kiss and Magic) and Chrysalis (Heart and Galaxy). Emap is being coy, but Horsman believes there would be pressure from the City for it to act. It could seek control of Scottish Radio Holdings (SRH). It already owns 27.8% of SRH after a £90m deal last year.
Total control of SRH would give Emap a 30% share of the UK radio ad market.
After that, it's guesswork. An Emap/Chrysalis merger looks logical, but would attract scrutiny from regulators because it would control 45% of London ad revenues. Another scenario suggested by Tilbian is that 'should ITV acquire the balance of SMG, Virgin would be an excellent fit with Chrysalis'.
Existing legislation makes it easier for TV companies than newspaper groups to make a play for radio groups. Horsman tips Disney as one to watch in the long term, and BSkyB has an eye on Wireless Group's talkSPORT.
For advertisers concerned about the implications of consolidation, RAB chief executive Douglas McArthur has this reassurance: 'Research shows big groups are more likely to have a broader programming offer. Large companies don't have all their licences chasing the same format, whereas rival groups congregate around the same audience.'
A Capital/GWR tie-up, it seems, is just the start. As US radio giant Clear Channel International has said: 'We believe UK radio needs consolidation. We'll watch the mating dance with fascination.'
DATA FILE - MERGER STEPS
- The first hurdle is gaining the approval of GWR's 29% shareholder, Daily Mail & General Trust. It is not expected to prove too problematic.
- Regulator Ofcom would have to apply a points test to see whether the merged group has accumulated too many local licences in one area. If it is found that they have breached the limit, divestment will be required.
- Ofcom will also initiate a change of control review to assess the merger's impact on the quality and range of programming.
- The Office of Fair Trading (under the Enterprise Act) will decide whether to refer the merger to the Competition Commission. There is no guidance on timescales because this would be the first radio merger to be considered under the new regulatory regime.