1. EMAP: CAN’T GET USED TO
LOSING YOU
GRANT GODDARD
December 2007

2. • Emap’s sale last week of its consumer magazine and radio divisions
to H. Bauer, the German privately-held publisher, for £1.14 billion is
nothing short of miraculous given declining consumption and
advertising trends in those business sectors currently, and for 2008
Shareholder reaction to Emap’s sale announcement on Friday was swift and
unforgiving. Traders pushed the group’s share price down almost 10% to end
the day at 746.5p, its lowest value since March 2007, which was prior to the
announcement in July of a potential break up. The City’s immediate
disappointment was that its expectations had been overturned. Emap
announced that B2B, which attracted the most bidders, was not to be sold;
whereas the magazine and radio segments, which have both suffered user
and revenue declines in recent months, were to be sold to a single bidder,
privately-held German publisher H. Bauer, for £1.14 billion in cash.
The notional sale price of Emap’s radio assets for £422 million represents
multiples of 3.0x pro forma 2007 revenue and 23.4x pro forma 2007 operating
profit. These ratios run slightly higher than the 2.6x and 19.5x respectively
achieved by the sale of Chrysalis Radio to Global Radio in July 2007 for £170
million, which was the last major transaction in the sector. On acquisition, both
Emap Radio and Chrysalis Radio similarly achieved a 13% operating margin
and earned around £25 revenue per 1000 hours listened to their stations. The
unexpected acquisition by Bauer has frustrated the ambitions of three
competing bidders who were eager to acquire the UK’s second largest piece
of commercial radio real estate.
Firstly, Global Radio desired Emap Radio to grow its current position from
third largest in the sector (with 11.8% of commercial radio listening) to the
market leader (36.5% including Emap). In the short time since its purchase of
Chrysalis Radio, Global has lost the contract to sell Guardian Media Group’s
radio advertising (to GCap Media, which estimates the contract will add £1.4
million full year profit); backed out of a deal to launch a national news channel
on Channel 4’s digital radio multiplex in 2008; and backed out of an
associated deal to re-brand its London station LBC as Sky News Radio. Now,
instead of the 99.9 million hours per week of radio listening it had previously
sold with the GMG contract, Global is left with only 51.2 million hours, a
middling amount for a medium used by national advertisers to reach mass
audiences, and insufficient to justify the continuance of its own sales
operation.
Secondly, former Chrysalis Radio chief executive Phil Riley had teamed up
with equity house Vitruvian and US buyout group Veronis Suhler Stevenson to
bid for Emap radio. Riley had initially retained his role after the transfer from
Chrysalis to Global, but quickly departed, conceding that former Capital Radio
Group programme director (and Fame Academy judge) Richard Park will now
drive Global’s strategy. The Emap acquisition would have enabled Riley to re-
join a sector in which management opportunities are being swiftly eroded
through consolidation, and where the current vacancy for Chief Executive of
GCap Media is likely to be the last foreseeable opportunity.

3. Thirdly, private equity group Texas Pacific Group and DLJ Merchant Banking
had joined forces with former Emap Radio chief executive Tim Schoonmaker
to bid. Schoonmaker had quit Emap in 2004 after 14 years’ work building up
the group’s radio empire, reportedly after having been refused a seat on the
main Emap board. Following involvement in an aborted private equity bid for
GCap Media in 2005, he joined Credit Suisse subsidiary DLJ in 2006, but has
yet to clinch a major media deal. The acquisition of Emap would have put
Schoonmaker back in charge of the portfolio he built mostly through
acquisitions in the 1990s.
One of the weaknesses of the commercial radio sector has always been the
tendency for business deals to be driven by egos rather than by common
business sense. This has resulted in radio assets being bought and sold at
prices considerably higher than their objective market valuations, leading to
many balance sheets being stuffed with overvalued radio licences (see UK
Commercial Radio Consolidation [2007-88]). Each of these three bidders
had their own reasons for buying Emap Radio, and all out of a sense of
desperation. This could result in further transactions if Bauer is prepared to
sell on certain radio properties or the whole division, though we view this as
highly unlikely. Bauer may have plans to derive commercial synergies from
the common ownership of magazines and radio stations in the UK, something
that Emap never managed to achieve (see Emap – pick up the pieces
[2007-56]).
If Bauer will not sell, Global Radio may have to set its sights on a bid to take
GCap Media private, something that is a practical possibility now that the
latter’s share price has fallen 33% year-on-year and hit a new all-time low of
125.75p in early December. Despite attracting 30.8% of commercial radio
listening (compared to Emap’s 24.8%), GCap’s market capitalisation is now as
low as £208 million. Nothing would please Global’s Richard Park more than to
recapture the company he quit in 2001, from which point onwards it has
suffered a continuous, steep decline. Acquisition of GCap would also produce
efficiencies in Global’s sales operation, which would then be offering more
than 50% of all commercial radio listening to national advertisers.
[First published by Enders Analysis as part of report 2007-114e.]
© 2007 Grant Goddard
Published by Radio Books
http://www.radiobooks.org
http://www.grantgoddard.co.uk