It's action stations for radio; Scottish Radio Holdings CEO Richard

RADIO consolidation is on. That was the simple message from the government last week as the long-awaited period of ownership changes and consolidation was ushered in.

Although the secretary of state for culture, media and sport, Tessa Jowell, and Patricia Hewitt, secretary of state for trade and industry, announced last Thursday that their departments would allow the sector to consolidate down to just two local commercial players instead of three, the market reaction was still rather muted.

The reason for this response was perhaps linked to the fact that industry veterans and analysts currently find themselves wrestling with a rather confusing situation, which offers them reasons to be simultaneously cheerful and slightly concerned.

Yes, next year's Communications Bill will finally liberalise the radio business, but while there is no doubt that industry giants such as Chrysalis, GWR, Guardian Radio Group and Scottish Radio Holdings (SRH) are excited at the possibilities of acquisitions and mergers, it is against a backdrop of gloom and continuing uncertainty in the advertising market.

SRH's chief executive Richard Findlay is only too aware of the contradictions that all radio groups must currently embrace. However, when balancing the potential for change and growth with the reality of tough trading conditions, Findlay quietly gives the impression that he is inclined to accentuate the positive.

"It promises to be an exciting time for the industry as we are finally hearing more about the Communications Bill," says Findlay, who has been in post since 1991. "We have been pushing hard for further liberalisation of ownership for a long time, and I have to admit it's been an uphill struggle, as the regulators always took a different view."

Executives at the company which runs Radio Clyde, Radio Forth and 16 other stations are clearly happy that the government has listened to the radio industry's arguments for further deregulation and amended a proposal, set out in the draft Communications Bill, which would have ensured that there would be at least three local commercial stations plus the BBC. There is also no doubt that they have no complaints about the government's clear statement that "the new radio ownership scheme would deliver substantial liberalisation, allowing growth and investment in local radio".

"People have come round to our way of thinking," Findlay adds, "and I think we are in a dynamic industry that can change very quickly. Not so long ago analysts were asking where the opportunities were, as everything had bottomed out."

According to those same analysts, the largest commercial radio operator in Scotland and Northern Ireland will highlight its financial and market strengths as the leading local radio group in the UK when it unveils its full-year results this week. The results follow the recent release of Rajar (the body which measures and profiles the audiences of UK radio stations) figures, which show that SRH stations across the country have an impressive 41% reach and a market share of 24.4% across their total coverage area.

In a trading update two months ago the group claimed that like- for-like revenues were at similar levels to 2001, with a 2% drop in radio advertising revenues offsetting an increase in revenues from its 43-paper regional newspaper division. While on Thursday SRH is expected to announce losses of around (pounds) 14m (largely due to (pounds) 20m in exceptional costs linked to its Score outdoor advertising business, since sold), analysts feel that it will slightly outperform the sector when it is expected to report that radio and newspaper revenues are fairly "robust".

Although nervous investors knocked down Capital Radio's stock last week after it admitted its ad turnover for October and November had dropped 8% and its chief executive, David Mansfield, said the group (which owns 19 stations including the London-based Capital FM) was also budgeting for "less revenue coming in, not more", Findlay argues that his Clydebank-based group (which Sunday Herald publisher SMG owns a 29.5% stake in) is in a position of relative strength, with net assets of (pounds) 130m as of March this year.

This strength is clear in the Scottish radio arena, where Radio Clyde still pulls in a 72% market share despite improved competition from the Guardian Radio Group's Real Radio.

Mansfield's assessment of market conditions is also more in line with that of Emap (owner of the Magic network and Kiss 100 station), which last week argued that revenues were showing signs of stabilising. Some analysts played down the drop in Capital's share price, saying that while pre-tax profits for the year had been halved to (pounds) 14.6m from (pounds) 27.8m, its full-year results contained no surprises.

"I think there are still media businesses out there increasing their market share," says Findlay. "It would be imprudent to argue that any improvements we see will continue through to the coming months. And although there are some reports that conditions are looking OK, it's far too early to say.

"However, I don't think the conditions present a barrier to change, as everybody currently regards themselves on the same boat. It's now a level playing field."

While Findlay is keen to stress that SRH's business mix - UK national advertising accounts for 39% of radio revenues, local ads 43% - has helped to shelter it from the worst of the economic downturn in the media sector, he argues the group is aware that market conditions will eventually improve.

"We never abandoned our local marketplace, like some, and we have maintained good relationships with local advertisers - something which has stood us in exceptionally good stead. Some companies thought the future was completely in national revenue.

"But we have been careful, because at the end of the day the advertising market will change. While national ad revenue can be switched off quickly, it can also be switched on quickly. And we need to make sure we can handle that when it happens."

In line with this commonsense approach, SRH has quietly been investing in its Score Digital business, set up in 1998 to push into the fledgling digital radio market. With licences for Glasgow, Edinburgh, Northern Ireland, Ayr, Dundee and Inverness, digital carriage has most recently been secured in Aberdeen.

While 3C, SRH's digital country music channel, is also going strong, investment levels are being controlled in what remains a slow- growth radio market. Findlay adds that despite its digital interests, SRH has not entirely abandoned the AM frequencies, still capable of delivering audiences and revenue.

As Findlay says he's happy with the current range of SRH's newspaper interests in Scotland and Ireland, how it handles the upturn is more than likely to involve acquisitions or joint ventures.

With its (pounds) 18m purchase of Southampton-based Wave 105 from the Wireless Group, the (pounds) 36.4m paid last November for the 76% of Radio Ireland it didn't already own and its recent joint venture with GWR (the UK's biggest commercial radio company) to operate two dance music stations in England, he admits that the conservative group has been unusually active over the last 18 months.

Prices, he argues, have been more realistic and look likely to remain so into 2003. And although the chief executive won't describe the size of his war chest, he claims that SRH still has the firepower to consider further sensible acquisitions.

However, he concludes: "If you are paying crazy prices, whether it's for radio stations or widgets, you need to get a return on your capital. If you pay too much employees often suffer, because owners need to sweat it out of the company. That's simply not our style."

Copyright 2002 SMG Sunday Newspapers Ltd.
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