Analysis of the announcement by United Kingdom media conglomerate Scottish Media Group plc that it will sell its national commercial radio station 'Virgin Radio' whose dismal performance it failed to turn around in the seven years since its acquisition, written by Grant Goddard for Enders Analysis in May 2007.

1. VIRGIN RADIO: A PIG IN A POKE
GRANT GODDARD
May 2007

2. ExecutiveSummary
Scottish Media Group (SMG) has now embarked upon the turnaround
strategy that was instigated in early 2007 by a shareholder revolt, which led to
a boardroom coup and the appointment of a new management team.
Although the company’s new strategy has yet to be revealed in detail, the
board has already decided to dispose of its Virgin Radio national radio station
in order to focus on television production and its two ITV licences.
SMG intends to dispose of Virgin Radio via an IPO, but this seems a risky
strategy at a time when a surfeit of radio station properties is on the market. If
a trade buyer emerges, it is most likely to be the Virgin Group, as the station
offers brand extension and cross promotion opportunities for Virgin Media’s
TV/broadband/telephony products. However, Richard Branson is unlikely to
make an offer at SMG’s current £105 million valuation.
This report outlines our views on the management pronouncements made on
the success and performance of Virgin Radio and, therefore, its value to
investors. These have been overplayed by SMG management:
• SMG claims that Virgin Radio’s “national presence is extremely strong”,
yet the station attracts the least listening of the UK’s three national
analogue commercial radio stations and achieves only 1% of all radio
listening outside of its London stronghold
• SMG claims that Virgin Radio “outperforms its peers”, even though the
station’s revenues and operating profit have both fallen precipitously since
it was acquired in 2000
• SMG has emphasised Virgin Radio’s success in attracting the 15-44 year
old demographic, although the station’s performance is only marginally
better than that of its two national commercial competitors, and
considerably behind that of the competing BBC networks
• SMG says that the Virgin brand “has never been so hot,” although market
research suggests that the recent advertising campaign accompanying the
re-branding of Virgin Media has not created substantial ‘buzz’
• SMG extols the virtues of Virgin Radio’s format mixing “modern and classic
pop and rock music”, although our assessment is that the station’s
determination to cover both genres has failed to maximise the audience for
either
• SMG claims that Virgin Radio’s web site has benefited from a substantial
increase in page views, but it seems unlikely that the station will achieve
its year-end target of 1 million unique users
• SMG insists that Virgin Radio is “very well run,” although our opinion is that
poor management has contributed significantly to the station’s dismal
performance.

3. Overview
The announcement by SMG of its intention to sell Virgin Radio via an IPO
appears to have been a last-minute decision made only hours before the
company published its preliminary results in April 2007. The sale is motivated
by SMG’s need to pay down its £157.3 million net debt (at year end 2006, up
from £139.1 million at year end 2005), and follows the renegotiation of a £193
million borrowing facility that will expire in September 2008. The anticipated
proceeds from the disposals of SMG’s other subsidiaries, Pearl & Dean and
Primesight, have not yet materialised, despite these businesses having been
on the market for six months. The addition of Virgin Radio to the sale list also
reflects the desire of the management team to refocus SMG on its core
television activities. New chief executive Rob Woodward, a former Channel
Four executive, believes that ”there is no synergy between Virgin and STV”
[Sunday Herald, 15th April 2007].
In their enthusiasm to paint Virgin Radio as a valuable asset, it appears that
Woodward and new chairman Richard Findlay have overplayed somewhat the
station’s performance. Below, we examine some of their claims and offer
evidence that tells a different, and sometimes contradictory, story.
The SMG Claims
1. “Virgin Radio’s national presence is extremely strong,” said Findlay
[analyst presentation, 12th April 2007].
In reality, Virgin Radio vies with the BBC’s classical music station, Radio
Three, for the title of the least listened to of the UK’s eight national analogue
radio stations. Nationally, Virgin’s AM service takes a 1.5% share of listening
(compared to market leader Radio Two’s 15.8%). In London, where Virgin can
additionally be heard on the FM waveband, it fares better (3.6% share), but
conversely it performs worse in the rest of the UK [RAJAR, Q4 2006].
Table 1
Virgin Radio – listening share and market rank
[Source: RAJAR, Q4 2006, TSA: London = Capital Radio, Manchester = Key 103,
Birmingham = BRMB, Glasgow = Clyde, Liverpool = City, Newcastle = Metro, N.
Ireland = Downtown, Sheffield = Hallam, Wolverhampton = Beacon]

4. 2. “Virgin Radio is an excellent company that consistently out-performs its
peers. It has out-performed the market 23 times in the past 27 months,” said
Woodward [analyst presentation, 12th April 2007].
Month-on-month, Virgin might well be performing better than the sector
average, where revenues have remained in negative territory for the last two
years (down 5% in 2006, and down 4% in 2005). However, in the longer term,
the financial outlook for Virgin Radio looks bleak. Between 2000 and 2006,
revenues fell from £33.6 million to £21.7 million, operating profit fell from
£15.0 million to £2.3 million, and the operating margin fell from 45% to 11%.
The only positive metric is the station’s yield of £25.79 revenue per 1000
hours listened in 2006, which was slightly above the industry average of
£24.59.
Table 2
Virgin Radio – financial data
[Source: SMG accounts, Virgin Radio acquired 14th March 2000]
3. “It consistently delivers for advertisers and has the largest national
reach and share of 15-44 year olds, and the number one share in London of
25-34 year olds,” said Woodward [analyst presentation, 12th April 2007].
It is true that, in the national market, Virgin Radio ranks marginally ahead of
the other two national commercial stations (Classic FM and TalkSport) in the
15-44 demographic, though the station’s 8% reach and 2% share place it a
long way behind the market-leading BBC networks [RAJAR, Q4 2006].
Table 3
Listening by demographic – national stations

5. [Source: RAJAR, Q4 2006]
In the London market, Virgin in fact ranks second in its share of listening
within the 25-34 demographic (of local stations), behind commercial radio
market leader Heart FM [RAJAR, Q4 2006, London demographic data is not
published for national stations].
Table 4
Share of listening by demographic – London commercial stations
[Source: RAJAR, Q4 2006]
4. “The Virgin brand has never been so hot,” said Woodward [analyst
presentation, 12th April 2007].
This year’s rebranding of NTL/Telewest to Virgin Media was supported by a
£20 million marketing campaign, and the company’s squabble with Sky TV
has certainly provided the Virgin brand with substantial column inches in
recent months. Nevertheless, research by BrandIndex found that Virgin’s
brand value registered a decline during March 2007, and that its ‘buzz’ rating
even fell into negative territory [Media Week, 27th March 2007]. In earlier
qualitative research [Manchester, 2004], one middle aged focus group
member commented that “with [the] Virgin [brand], straight away you think of
Richard Branson,” although a younger participant suggested that “the main

6. aim [of Virgin Radio] is the commercials rather than the music – he does
things to make a profit”. The research results suggested that the Virgin brand
conveys more positive attributes to older consumers who recall Branson’s
pioneering entrepreneurial spirit than to younger demographics, some of
whom view it merely as another large company.
5. “Ask listeners what Virgin Radio stands for and they’ll tell you – it’s a
contemporary take on both modern and classic pop and rock music,” said
Woodward [analyst presentation, 12th April 2007].
It is our opinion that this positioning of Virgin Radio in a no man’s land
between ‘rock’ and ‘pop’ is a large part of the station’s problem, as it
simultaneously targets the audiences of both BBC Radio One and Radio Two.
By trying to appeal to the entire width of the 15-44 demographic (which spans
a whole generation), Virgin attracts none of these listeners in quantity, and the
station’s unique selling point appears to be some kind of ‘Radio One And A
Half’. One third of the artists on the current Virgin Radio playlist also appear
on the current Radio One playlist, while one third also feature on the current
Radio Two playlist.
6. “Page impressions [of the Virgin Radio web site] are up 75% and pages
per visit are up more than 50%,” said Woodward [analyst presentation, 12th
April 2007].
These claims prove difficult to corroborate without reference to a specific time
period. As noted previously (see Scottish Media Group: the only way is
up? [2007-28e]), the reach and monthly page views of the Virgin Radio web
site have shown year-on-year declines, and it remains difficult to see how
SMG’s target of 1 million unique users by year-end, up from 300,000 in
December 2006 [comScore], will be achieved.
7. “[Virgin Radio] is very well run,” said Woodward [Financial Times
podcast, 12th April 2007].
We believe that the station has suffered from poor management over many
years. Its acting chief executive, Paul Jackson (who was recruited as Virgin’s
programme director in 2001), has repeatedly promised an improvement in the
station’s performance, but has not delivered to date. When DJ Christian
O’Connell was signed to present the station’s breakfast show two years ago,
Jackson said: “This is the moment our competitors will have sleepless nights
over” [The Guardian, 19th May 2005]. Since then, the peak breakfast show
audience has increased only marginally from 199,000 to 224,000 [RAJAR, Q4
2004 vs. Q4 2006, weekday average half-hour audience, 0800-0830].
Valuation

7. In his efforts to achieve a good price for Virgin Radio, Woodward’s spiel has
sometimes sounded too much like some dodgy used car salesman
desperately trying to pass off an old jalopy as the best bargain on the
forecourt. Interestingly, asked if SMG would be maintaining a stake in the
post-IPO Virgin Radio, Woodward replied: “I don’t see much point in retaining
a small, minority stake in the entity” [analyst presentation, 12th April 2007].
Public debate has followed over the realistic valuation of a radio station whose
operating profit could easily move into negative territory before the decade is
out. In our opinion, not even the new management’s decision to write down
the net book value of Virgin Radio from £163.8 million to £105 million is
anywhere near sufficient impairment to reflect the station’s true value. In
December 2004, a £100 million cash offer for Virgin Radio by a consortium led
by Lord Waheed Alli was rejected by the then SMG board, when the station’s
net book value was still £160 million. Lord Alli predicted then that “by January
2006, it will be worth £50 million”[Scotland On Sunday, 13th February 2005],
a figure that more accurately reflects the station’s value today.
Inevitably, Virgin Radio’s national AM licence will increasingly diminish
towards almost zero value, as listeners continue to switch to higher quality FM
and DAB radio reception. Not even Ofcom’s decision to substantially reduce
Virgin Radio’s AM licence fee starting in 2008 (see UTV and SMG merger
could revive commercial radio sector [2006-e42]) will prove sufficient to
imbue the AM licence with value. In contrast, Virgin Radio’s London FM
licence is potentially as valuable as those of Heart FM, Magic FM or Capital
FM, particularly as the city’s 11m adult population is currently un-served by a
classic rock station on FM. In London, Virgin already outperforms GCap
Media’s Xfm ‘alternative rock’ station (3.6% vs. 1.3% share) and the station
could genuinely become the commercial radio market leader in the 25-34 year
old demographic, similar to the way that EMAP’s Kiss FM dominates 15-24
year olds and Chrysalis’ Heart FM dominates 35-44 year olds, if only it were to
adopt a more focused format [RAJAR, Q4 2006].
Trade Buyer
SMG’s announcement of the Virgin Radio IPO succeeded in attracting a
considerable amount of press coverage, foregoing the need to privately hang
up a ‘for sale’ sign in a sector that has become increasingly crowded with
sellers (Chrysalis, EMAP, Local Radio Company, Macquarie, Tindle) but
empty of buyers (Guardian Media Group excepted). The most likely trade
purchaser would be Richard Branson’s Virgin Group, which had originally sold
the station to Chris Evans’ Ginger Media for £88 million in 1997. For Branson,
Virgin Radio would prove more valuable as a brand extension of Virgin Media
than as a standalone business, although he would be unlikely to pay
anywhere near SMG’s current £105 million valuation. Acquisition of a radio
station could also help counterbalance other parts of Branson’s empire that
are under pressure from fundamental changes in music consumption (see
Recorded Music and Music Publishing [2007-29]). Last year, he disposed
of the US arm of his ‘V2’ record label (launched in 1996 after he sold ‘Virgin
Records’ to EMI for £560 million) while, in the UK, Branson’s ‘Virgin

8. Megastore’ chain has suffered operating losses since 2002 and is locked in a
struggle with competitor HMV to be the ‘last man standing’ in high street
music retail.
While the radio station’s ‘Virgin’ name could well prove a millstone to another
owner, particularly as the licence from Branson to use it expires in 2022, for
Virgin Media it would offer innumerable opportunities to cross promote the
company’s cable, broadband, fixed and mobile phone services (although,
annoyingly for Branson, Sky TV has contracted to sponsor the station’s
breakfast show until January 2008). The purchase of Virgin Radio would also
offer Branson a more personal opportunity to re-write his frustratingly
unspectacular career in UK radio to date. After the failure of his overnight
networked service ‘Radio Radio’ in the late 1980s, Branson took a minority
stake in London start-up Kiss FM which he then tried to increase once the
station achieved its 1 million ratings target in its first year, a proposal rejected
by his fellow shareholders. Piqued, Branson sold out altogether and
successfully made a £1.9 million per annum cash bid to the regulator for its
newly offered national AM music licence, which he launched as Virgin Radio
in 1993. The station was unfocused from the beginning, driven largely by
former BBC staff who lacked the commercial expertise to achieve Branson’s
objective of creating “the most exciting development in music radio for 30
years” [rpm, 24th April 1993]. Virgin Radio’s performance peaked in 1994 with
a 3.9% share, which had already dipped to 2.2% by the time Branson sold it
three years later.
Since then, Branson has concentrated his radio efforts overseas, launching
‘Virgin Radio’-branded stations in Thailand, others in India (‘Fever’) and Paris
(‘Oui FM’), and with plans for Dubai, South Africa and Italy. Two years ago, he
approached SMG with the idea of launching a Virgin-branded internet radio
network aimed at international markets, but nothing came of it. In France,
Branson is now awaiting regulatory approval of a deal in which national
network ‘Europe 2’ will be re-branded ‘Virgin Radio’ by owner Lagardère
(which already owns Virgin Megastores there). He is also known to be
planning the launch of a Virgin-branded interactive music TV channel that will
compete in the UK with Viacom’s MTV brands and with EMAP’s seven music
TV channels, at least one of which will probably be rebranded under a joint
venture with Channel Four.
For SMG, a quick cash sale of Virgin Radio to Branson would alleviate the
need for an expensive IPO and would immediately help to reduce the group’s
net interest payments (£10.4 million in 2006). The only disappointed person is
likely to be Scottish radio industry veteran Richard Findlay, who was
appointed chairman of SMG on 28th February, only to find six weeks later the
company announcing its intention to divest its only radio asset. However, in
partnership with his son Adam, Findlay has already registered a company
called New Wave Media that could be aiming to acquire local radio stations in
Scotland (Adam Findlay commented: “If any EMAP stations came up for sale,
we would be expressing an interest in being involved” [Scotland On Sunday,
7th April 2007]).

9. The Outcome
As one of only three national analogue commercial radio stations, Virgin
Radio’s sale is undoubtedly a significant event for the commercial radio
sector. Unfortunately, it comes at a time when more radio properties are on
the market than ever before, and at a time when the industry’s traditional
advertising model is under considerable stress from structural changes in
music consumption and marketing expenditure.
The danger of a Virgin Radio IPO is that it might merely demonstrate how
much the City has fallen out of love with the commercial radio sector. Despite
one newspaper’s valiant comment that “one of the attractions of investing in
Virgin Radio's float is the knowledge that you are buying into a company that
has already halved in value” [Evening Standard, 13th April 2007], our
considered opinion is that the station remains in commercial freefall and
represents little value in its present incarnation to any buyer other than
Branson.
[First published by Enders Analysis as report 2007-40.]
© 2007 Grant Goddard
Published by Radio Books
http://www.radiobooks.org
http://www.grantgoddard.co.uk