A blow to consolidation?

Phil Riley, former chief executive of Chrysalis Radio, is unequivocal in his view that the surprise buy-out has put a “poke in the wheel” of the consolidation of the industry, pointing out that Bauer has not sold a single brand in its more than 100-year history.

Others have also expressed amazement that Bauer, publisher of titles including Take a Break, would decide to enter the UK radio market in such a dramatic way.

Charles Allen’s Global Radio, fresh from scooping up Chrysalis’ Heart and Galaxy brands, was red hot favourite to land the Emap stations, only to be trumped by Bauer.

It’s believed that Global tabled a more substantial bid for the stations themselves, which include Magic and Kiss, but Bauer’s £1.14 billion package for both the stations and consumer magazines was more attractive to Emap.

Bauer still managed to pay over the odds – Emap’s radio arm went for £422 million, slightly more than the £400 million valuation placed upon the brands. All of this meant a nice pay-out for Emap shareholders, with £1 billion set to be paid out at 461p per share.

Instantly derided as having no experience in the radio industry, a closer look reveals that Bauer is not going into the sector completely blind, despite its overwhelming magazine focus.

The company owns 25 per cent of Radio Hamburg, a popular hits station that belches out music from the 80s, 90s and 2000s.

Perhaps more significantly, however, Bauer acquired RMF FM, a Polish station, in 2006. The station is the largest commercial station in the country, with a 22 per cent share of the audience.

Bauer has turned RMF FM into a music and news hybrid, split 65 per cent to 35 per cent in the former’s favour. Targeting 20 to 40-year-olds, various chart hits are complemented by genuinely rigorous news – RMF FM’s reporters were the only Polish journalists reporting directly from Baghdad during the Iraq war.

So what does this mean for the likes of Magic, a middle of the road market leader, and Kiss, a dance station? Industry experts feel that it’s unlikely that there will be major format changes or mass culls due to Bauer’s limited knowledge of the UK radio market.

Bauer’s gameplan

However, it’s understood that there will be plenty of changes on the commercial side of things. Significantly, Bauer has both Emap’s radio and consumer magazine brands, allowing for plenty of cross-promotional opportunities.

“Bauer has no real experience in radio, but they will bring new ideas to the table,” says Amanda Barrett, head of radio at Universal McCann. “They have strong brands, and I expect we’ll hear more about media brands and integrated partnerships rather than silos.

“The traditional advertising model might shift, or there could be a combination of old and new models. They will probably span across a number of channels, even outdoor.”

Jonathan Barrowman, head of radio at Initiative, agrees. “Bauer still has the magazines, so cross-media opportunities are still possible. It appears to want radio and consumer mags as a combined proposition so hopefully radio is valued by them.

“It’s hard to sell brands across platforms – people work in silos at agencies, so Bauer could help improve that.”

Emap can point to some progress in developing the advertising propositions on its stations, particularly with the relaunched Heat. Four premier advertisers have divided up the ad space amongst them, with programming and advertorials also branded by the main sponsors.

Heat Radio is now more closely based upon the content of the magazine, in what Emap hoped would provide a brand recognition boost to the station.

Bauer may well want stronger links between its magazine and radio brands, launching integrated on-air versions of, for example, FHM and Grazia.

 In a radio market plagued by declining ad revenues, this could help spark interest among brands. Some, however, are not convinced that things will radically change.

“Emap tried cross-media activity between its brands, but its main income was through its magazines and stations,” says Howard Bareham, head of radio at MindShare. “Bauer will have the same problem as everyone – the ad market isn’t fantastic and it’s hard to run digital stations, whatever the brand.

“However, Bauer has some good brands now and it may look to sell them differently. It is a private company, so it has more time to invest without shareholder pressure, which has badly affected GCap.”

All eyes are on the aforementioned GCap, the commercial radio industry leader that’s facing up to fresh turmoil following a period of apparent recovery.

GCap sized up

With Emap’s stations now heading for Bavaria, Global has switched its attention to GCap. A £300 million bid was rebuffed by the GCap board, despite the company’s value having dropped to £215 million from a high of £710 million when it was formed via a botched merger between GWR and Capital in 2005.

A new offer looks likely, but not until Fru Hazlitt, the newly-installed GCap chief executive, outlines her plans for the company on 11 February. She will need every ounce of her bullish approach to business to ward off Allen’s approach.

“Global certainly won’t get its hands on GCap easily,” explains Barrett. “Fru Hazlitt (pictured) will be given a chance to explain her plans for the company.

“There will certainly be new players in the next 12 months and I couldn’t be surprised if we ended up with two super groups. The SMG (owner of Virgin Radio) and UTV (TalkSport) talks may well bubble up again and mergers will continue, which certainly isn’t a bad thing.”

Those hoping for an uplift in commercial radio’s fortunes – both in terms of ad revenues and the battle against the well-funded BBC – feel that Global would’ve fared better with Emap under its belt, rather than GCap.

Global’s Galaxy and Heart brands, dance and mainstream stations respectively, would’ve fitted nicely with their counterparts at Emap – Kiss and Magic.

An amalgamation with GCap’s brands is a little more problematic. Having one owner for Capital Radio and Heart, two large London stations, would require investigation under competition rules, potentially leading to further sales.

Barrowman says: “Everyone hoped for Global as that’s proper consolidation. This is just a change of ownership – nothing much has altered.

“The trouble is that that Global would have to dispose of its Heart brand in London due to competition rules, so that’s not really consolidation either. And would GMG be happy with the sales contract at GCap going back to Global? (GMG tore up its contract with Global last year, handing it to GCap) It’s all very messy.”

All of this could have a destabilising effect on GCap, which has shown recent signs of clawing back its plunging revenues and growing its shrunken Capital audience. Hazlitt is unlikely to have warmly welcomed the takeover bid just a month after she succeeded Ralph Bernard.

“GCap needs to make sure it doesn’t take its eye off the ball,” says Barrett. “It looked like it was turning the corner, and now it’s in the limelight again.

“Capital has certainly changed, and it has invested heavily in marketing, but it’s not as simple as throwing money to the wall and hoping it’ll stick. You need the talent and quality content too.”

Global, which is desperate to grow its market share, has the funds to expand but it may well be wise to learn from the problems encountered following GCap’s formation.

Is consolidation the answer?

As GCap has proved, consolidation, seen as the answer to the commercial sector’s ills, isn’t necessarily a good thing.

MindShare’s Bareham says: “People want investment in stations but consolidation doesn’t automatically mean that.

“It can cut costs in programmes and talent, but it doesn’t necessarily mean that one follows the other - just look at GCap.”

The shadow of GCap’s problems looms large over the industry. But, happily, this hasn’t deterred new investors, such as Global, Channel 4 and Bauer, from getting involved.

Despite being regularly written off as an irrelevant medium, radio is still seen as a potentially profitable medium. It is, after all, listened to by 90 per cent of the population on a regular basis. The lesson, it seems, is not to do mergers in the costly, short-sighted, City-focused way GCap did.

“GCap hasn’t acted like a market leader,” says Initiative’s Barrowman. “Global, Channel 4 and Bauer have a different business model to GCap in that they want to invest big money into radio and they don’t have shareholders to answer to.”

The current upheaval in the market may be unprecedented, but it may not be set to end. Predictions of two super groups abound and 2008 could be the year when it finally happens. Expect plenty of horse trading, and one or two surprises, along the way.

Click here to download our PDF containing the top-line results as well as analysis of the implications for the UK’s key radio stations