An analysis of the potential for merger and acquisition activity in the UK commercial radio sector during 2005, written by Grant Goddard in January 2005 for The Radio Magazine.

1. 2005 – THE YEAR OF RADIO
MERGERS
by
GRANT GODDARD
www.grantgoddard.co.uk
January 2005

2. The unexpectedly sudden approval of the Capital/GWR merger last month
signals that 2005 is the year when the UK commercial radio industry will be
transformed by mergers, acquisitions and rumours thereof. By the end of this
year, the notions behind the introduction of “independent local radio” in 1973
will finally be laid to rest. Back then, the government planned that each city
and town should have its own commercial radio outlet, managed by a board of
directors living in the vicinity, funded predominantly by local capital, employing
local staff to produce programming specific to that town’s concerns.
Much has happened since 1973 to change the UK media landscape beyond
recognition, but commercial radio is still struggling to attract the loyalty of
increasingly fickle, media-deluged consumers. Last year, listening to local
commercial station fell to its lowest level for a decade. By the end of 2005, only
a handful of the UK’s 278 independent local radio stations will remain locally
owned, and most already have nationally networked programmes in their
schedule. Stations owned by large groups play the same music from one end
of the country to the other, and their national brand names are replacing
former station identities that had communicated local relevance.
Since the Communications Act was legislated in 2003, the radio industry has
been on the edge of its seat, waiting for the first sign of mass consolidation
that was the inevitable outcome. An earlier attempt in 2002 by GWR to
brazenly pre-empt the relaxation of ownership rules by extending its
dominance in the West Country was firmly thwarted by the Competition
Commission. GWR already controlled 77% of local radio advertising revenue in
Bristol and Bath, and 84% in Taunton and Yeovil, when it tried to take control
of a regional station “Galaxy 101” that covered these same towns. The
Commission rejected GWR’s ambition to increase these figures to 90% and
99% respectively, a decision that sent shock waves through a radio industry
that had become accustomed to exploiting such high market concentrations.
Phil Riley, CEO of Chrysalis Radio which had sold Galaxy 101 to GWR,
commented at the time: “If the Competition Commission had allowed the deal
to stand, it would have sent a clear signal that any number of combinations [of
mergers] were allowed. But this ruling means there is no automatic green light.
Whoever decides to try to merge or acquire radio stations and increase their
share of the market is going to have to make a call about whether they are
likely to fall foul of the Competition Commission.”
Since May 2003, when the Commission finally said “no” to GWR, mergers and
acquisitions have been the most discussed topics within the radio industry,
though nothing at all happened until September 2004, when Capital and GWR
announced that they would join forces. The green light unexpectedly given to
this deal by the Department of Trade and Industry now gives other radio
owners such as Chrysalis a better understanding of how far they can push the
dominance of their stations in local markets without falling foul of competition
law. The creation of one giant radio owner in the shape of the merged
Capital/GWR is bound to encourage a rash of similar transactions amongst
smaller players in the market.
2005 – The Year Of Radio Mergers
©2005 Grant Goddard
page 2

3. The Communications Act itself relaxed previous radio ownership rules and
requires that at least two local commercial radio operators exist in each area,
in addition to the BBC. The maximum number of stations that can be owned by
one group in a local market is controlled by a “points” system, similar but more
complex than the Radio Authority system it replaced, that accounts for coowned stations’ overlapping transmission footprints. Such restrictions relate
only to the population served by a group’s stations, and not to the share of
radio listening or radio advertising that the group achieves within a local
market. The effect is that, as long as sufficient plurality of ownership exists in a
market, the requirements of the Act are fulfilled, even if one of the two radio
owners attracts 99% of commercial radio listening and the other a mere 1%.
This emphasis within the Communications Act on plurality rather than market
share is the precise reason why UK competition law has suddenly become
more relevant to radio owners seeking mergers and acquisitions than any
specific broadcasting law. A proposed merger can qualify for investigation by
the Competition Commission if the business to be merged controls at least
25% of the market for a good or service within a geographic market. Because
of the relative scarcity of radio broadcast licences in the UK, a radio group’s
share of radio advertising can often surpass this threshold in at least one of the
local markets in which it operates. The commercial radio industry refutes the
opinion that their stations’ considerable market shares constitute undue
influence, arguing that the market for radio advertising is not a distinct market,
but rather is only part of a much larger market for media advertising that
includes television and the local press. However, in its last two investigations
of the radio industry, the Competition Commission rejected such arguments
and declared that the radio advertising market is a separate market that must
not be dominated by any single radio group.
The need to comply with competition law has come particularly difficult to longestablished radio groups whose very origins derive from a former media
regulator, the Independent Broadcasting Authority, having granted them a
monopoly over radio advertising in their local market between 1973 and 1989.
“If we do see more substantial radio consolidation,” explained Richard
Hitchcock, a media analyst at Numis, “companies will have to think about the
local advertising implications and consider more disposals of individual stations
and asset swaps as part of this big wave of consolidation they were
expecting.” Andrew Walsh, media analyst at Altium Capital, added: “It was
never going to be the free-for-all some people were hoping for. People focus
on the media regulations and forget about the competition law behind it.”
Suddenly, the skills of competition analysis within local markets have become
a pre-requisite to understanding the seismic shifts in radio station ownership
that are likely to happen in the coming year. Unfortunately, such analyses are
made more difficult because the advertising revenue figures of individual
stations are not made public (as they are in the United States), effectively
hiding from the public gaze how firm a grip a particular radio group has on the
radio advertising market in a particular city.
2005 – The Year Of Radio Mergers
©2005 Grant Goddard
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4. A complementary measure of a radio group’s dominance within a local market
is the amount of radio listening its stations’ attract, as a proportion of all
listening to commercial radio. If anything, such audience share data tends to
underestimate the ability of a dominant radio group to generate revenue, and
to overestimate less popular stations’ struggle to turn listeners into cash. As
the Competition Commission has noted, newer smaller stations within a market
operate at a considerable competitive disadvantage compared to “heritage
stations” that have enjoyed more than a decade’s head start on establishing
links with both listeners and advertisers.
KM
Tindle
CN
Sunrise
UKRD
Lincs FM
LRC
Saga
SMG
GMG
Wireless
SRH
EMAP
Chrysali
s
UBC
market
Capital /
GWR
TSA
market
rank
share of commercial radio listening in metropolitan markets - 2004 Q3
48,862,000 UK
36% 2% 15% 11% 8% 7% 5% 4% 2% 2% 1% 1% 1% 1% 1% 0%
1 10,435,000 London
32% 0% 19% 16% 0% 5% 4% 5% 0% 0% 0% 0% 3% 0% 0% 0%
2 2,686,000 Manchester
22% 0% 25% 12% 0% 5% 5% ? 0% 1% 0% 1% 0% 0% 0% 0%
3 2,006,000 Birmingham
33% 2% 6% 33% 0% 4% 0% 2% 15% 0% 0% 0% 1% 0% 0% 0%
4 1,834,000 Glasgow
14% 0% 3% 0% 44% 7% 22% 2% 0% 0% 0% 0% 0% 0% 0% 0%
5 1,769,000 Liverpool
21% 1% 39% 1% 0% 4% 7% 2% 0% 0% 0% 0% 0% 0% 0% 0%
6 1,373,000 Newcastle
25% 0% 39% 22% 0% 3% 0% 1% 0% 0% 0% 0% 0% 0% 0% 0%
7 1,284,000 Bristol/Bath/Swindon 61% 10% 3% 2% 8% 3% 1% 2% 0% 0% 0% 5% 0% 0% 0% 0%
8 1,279,000 Wolverhampton
37% 4% 6% 29% 0% 5% 0% 2% 12% 0% 0% 0% 0% 0% 0% 0%
9 1,273,000 Preston/Blackburn 29% 0% 32% 1% 0% 11% 8% 2% 0% 2% 0% 0% 0% 0% 0% 0%
10 1,265,000 Sheffield
8% 1% 34% 18% 0% 12% 11% 3% 0% 0% 0% 0% 0% 0% 0% 0%
source: RAJAR/RSL
The merged Capital/GWR group will account for more than a third of all
commercial radio listening across the UK (a further 2% is accounted for by
UBC, to which GWR’s AM stations were “warehoused” to comply with
ownership limits imposed by the former Radio Authority). The industry expects
the next merger will be between EMAP and SRH, whose combined share of
commercial radio listening would be 23%. Between them, these two radio
“supergroups” – Capital/GWR and EMAP/SRH -would control almost two thirds
of all radio listening in the UK, making the remaining radio owners look
decidedly small by comparison. This will force the hands of Chrysalis, The
Wireless Group, Guardian Media Group and Scottish Media Group to quickly
form alliances to hold their positions in the market.
Paradoxically, the large radio groups need to ensure the existence of the small
groups to ensure that they themselves comply with the Communications Act
requirement that there are at least two local commercial radio owners in each
market. This is why some of the large groups will maintain minority
shareholders in the smaller companies, not because they seek to exert control,
but because the smaller group’s survival guarantees their own compliance with
broadcast law.
The gulf between the size, turnover and profitability of the largest and the
smallest groups will widen, unless the larger groups find they are required by
competition law to divest some of their local stations. In the wake of similar
radio industry consolidation in the United States, stations that Clear Channel
2005 – The Year Of Radio Mergers
©2005 Grant Goddard
page 4

5. has been forced to sell in order to diminish its market concentration in certain
cities have helped smaller radio groups to build substantial portfolios at
reasonable purchase prices, helped by laws that financially encourage media
ownership by ethnic minorities. How much divestment of stations might be
required in the consolidation of the UK industry is one of the unknown factors.
The Competition Commission has noted that there are significant barriers to
entry for anyone wanting to open a radio station to compete with the existing
players, because so few new radio licences are under offer from the regulator.
Additionally, new radio delivery technologies such as DAB, cable and
broadband are unlikely to impact significantly on existing local markets for
several years. The scarcity of new entrants to the radio industry makes it even
more imperative that the regulatory bodies – the DTI and Ofcom – act
consistently and decisively in the coming months to ensure that consolidation
can forge ahead with proper and fair analyses of the relevant competition
issues in each of the affected local radio markets.
By the end of 2005, the commercial radio landscape is going to look very
different from what it does now. Hopefully, the consolidated industry will serve
the audience for radio better than the poor performance it has given us in
recent years. Back in 1973, the week that Britain’s first commercial radio
station opened, Campaign magazine commented: "Commercial radio [is]
equated in many minds with staggeringly inane disc jockies, endless hours of
top twenty pop music, and a barrage of advertising blending confusingly with
the programmes. Clearly, commercial radio in Britain is not going to be that
sort of operation.” This biggest fear in the 1970s, that our radio system might
resemble American commercial radio, is now closer to reality than ever before.
Before long, US giants such as Viacom, Clear Channel or Disney could even
own a large chunk of our radio real estate. Make way for the radio revolution.
[First published in 'The Radio Magazine', #666, 15 January 2005, pp.26-27]
Grant Goddard is a media analyst / radio specialist / radio consultant with thirty years of
experience in the broadcasting industry, having held senior management and consultancy
roles within the commercial media sector in the United Kingdom, Europe and Asia. Details at
http://www.grantgoddard.co.uk
2005 – The Year Of Radio Mergers
©2005 Grant Goddard
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