QUALIPORT
Runners In The Race For Radio

By Maynard Paton (TMFMayn)
January 26, 2004

The race for radio is hotting up. Just a month into 2004, the sector has already witnessed merger talks, a takeover, a 'strategic asset sale' and rumours of 'formal discussions'. New ownership laws could well make this year an exciting one for industry shareholders.

Regulator

To recap, commercial radio is an appealing sector for long-term investors, as competition is restricted by the need for a licence to broadcast. OFCOM (the new regulator for radio, television, telecommunications and wireless communications) manages the radio spectrum for commercial users and when awarding a local analogue licence, it considers (among many other points):

* "The extent to which any such proposed service would broaden the range of programmes available by way of local services to persons living in the area or locality for which it would be provided, and, in particular, the extent to which the service would cater for tastes and interests differentfrom those already catered for by local services provided for that area or locality."

* Whether "an applicant has access to sufficient financial resources to establish and maintain the proposed service."

This means new entrants are likely to be niche or specialist stations, who won't steal a rival's advertisers by simply replicating their broadcasting formats. Also, 'sufficient financial resources' restricts small start-ups from entering the fray and limits desperate advertising rates from cash-strapped newcomers. Read more.

The table below lists the quoted runners in commercial radio:

Company	Share    price (p)	Market value (£m)	Year to	Analogue   sales   (£m)	Analogue/  group  (%)	Analogue   margin (%)
GWR (LSE: GWG)	300	393	Sep 03	122.9	97	17.7
Capital Radio (LSE: CAP)	523	434	Sep 03	114.6	99	22.9
Emap (LSE: EMA)	904	2,320	Sep 03	92.0	9	25.0
Chrysalis (LSE: CHS)	234	393	Aug 03	54.9	22	21.1
Scottish Radio (LSE: SRH)	926	322	Sep 03	49.2	59	27.8
Wireless (LSE: TWG)	109	77	Jun 03	29.1	100	0.0
SMG (LSE: SMG)	130	409	Jun 03	24.1	10	29.0

Qualiport articles on Emap, Capital Radio and Scottish Radio highlight the high operating margins and great cash generation to be found in the sector. Another investor attraction -- perhaps -- is the introduction of the Communications Bill, which late last year relaxed the rules concerning the ownership of commercial radio stations. The change in legislation will almost certainly spark another round of consolidation in the industry. In fact, the first month of 2004 has already seen:

1. Details emerge of SMG's proposal for a nil-premium merger with Scottish Radio. SMG's 'inability to secure an agreement on terms that deliver value' and disagreements over the top jobs were cited as reasons for the talks breaking down;

2. Emap purchase a 27.8% shareholding in Scottish Radio from SMG for £91m. Emap finance director Gary Hughes said: "We believe that there will be opportunities for consolidation within the UK radio sector now that the Communications Bill has been enacted. Against this background, we regard the stake in SRH as an attractive strategic asset." In an interview with Bloomberg, Hughes added that the process of consolidation could be "lengthy and messy";

3. Wireless offer £8m for AIM-listed Forever Broadcasting (LSE: FOB), a three-station analogue radio group, and;

4. Market rumours of 'formal discussions' between GWR and Capital Radio. GWR today denied the reported discussions were taking place.

Racy

Not surprisingly, valuations in the sector look rather racy at present. As well as the potential for corporate activity, radio advertising is also picking up. For example, news today that Scottish Radio has seen like-for-like first-quarter radio sales improve nearly 8% underlines the possibility for some chunky earnings improvements ahead. With radio operating costs largely fixed, additional advertising sales go straight to the bottom line.

The ratings of the three pure-play radio operators are shown below:

Company	Share     price   (p)	P/E	PSR
GWR	300	38.2	3.2
Capital Radio	523	26.3	3.8
Wireless	109	79.6	2.6

On a price to earnings (P/E) basis, all three offer no obvious value. While this update on Capital Radio -- which carries the lowest P/E of the three -- showed how the figures could be jigged around, there was no room to make any decent value case. Worth noting too that Wireless is offering 2.2 times continuing sales for the loss making Forever, a multiple somewhat lower than the price to sales (PSR) ratings sported elsewhere in the sector.

From the Qualiport's point of view, portfolio member Emap and its holding in Scottish Radio provide most interest. After paying a forecast P/E of 23, Emap confirmed they would only initiate a full bid for Scottish Radio if another party makes a formal offer or buys a 20% stake. Emap has put itself firmly in the consolidation mix, but thankfully -- given current valuations -- refrained from anything further.

Indeed, SMG appeared to have little option but to sell its Scottish Radio stake. During 2000, the company invested £150m in its tartan counterpart (i.e. it has lost about £60m) as well as buying Ginger Media (owner of Virgin Radio) for £225m. When advertising sales slumped soon after, the associated borrowings led to financial troubles, which in turn forced the sale of its newspaper division and did no favours for the share price. Needless to say, sector investors and finance directors alike ought to remember the events at SMG when running in the race for radio.

More: Why Radio Is Great For Buy And Hold | Danger: Acquisition In Progress | OFCOM