Analysis of the likely sale and break up of United Kingdom media conglomerate EMAP plc focused on the group's significant commercial radio portfolio and predicting (correctly) a single overseas buyer, written by Grant Goddard for Enders Analysis in June 2007.

1. EMAP: PICK UP THE PIECES
GRANT GODDARD
June 2007

2. ExecutiveSummary
Emap, the consumer and business-to-business (B2B) publisher, appears ripe
for a break-up. It reported lacklustre results for its last financial year and lost
its chief executive, Tom Moloney, in May. This report closely examines the
appeal of Emap’s radio assets.
Emap Radio has exhibited growth as a result of the integration of 21 stations
acquired in 2005 from Scottish Radio Holdings, although the division’s
underlying performance is flat.
More generally, Emap has failed to extract fully the synergies from its
presence on multiple platforms – print, online, TV and radio – in a coherent
and timely way. One reason, we suspect, is that Emap has operated its
divisions in silos for too long. Post-Moloney, Emap is now intending to
produce content for multi-platform distribution, rather than platform by
platform, as part of its cost-cutting ‘Magazine 2010’ plan. Strong senior
appointments will also give the group a belated chance to join the operational
dots between its divisions. But management needs to act very quickly, before
investors pick up the most attractive pieces of the group.

3. Introduction
Emap’s lacklustre results for the financial year ended 31 March 2007 were
over-shadowed by the sudden departure in May 2007 of chief executive Tom
Moloney, after four years at the helm and a 26-year career with the group.
Last year, Moloney had pledged to focus on “delivering compelling content to
customers when, where and how they want it”, but Emap’s results suggest
there have been problems in delivering this policy. Chairman Alun Cathcart
stressed that “there [had been] no disagreement over strategy” between
Moloney and the board, but that “there has to be a change of direction in this
company” and “we have to get things done better and faster”.
In FY 2006/07, group underlying revenues were down 1% on a like-for-like
basis, and operating profit was up 2%. Pre-tax profit was down from £223 to
£193 million, the dividend per share was increased from 30p to 31p, and net
debt was reduced from £520 to £413 million, helped by the sale of Emap
France for £380 million during the year. In the current year, Emap is expected
to dispose of its Australian consumer magazines, French exhibition business
and Irish radio stations.
Table 1
Emap revenues, FY 2005/06 and FY 2006/07
[Source: Emap accounts, all figures exclude Emap France, which was divested.]
Emap’s lacklustre results demonstrate a strategic failure to extract synergies
from its group operations. This failure goes back some time. Emap initially
diversified from local newspapers and magazines into radio in 1990,
convinced that potential synergies were possible between its two market-
leading teenage magazines, ‘Smash Hits’ and ‘Just Seventeen’, and the UK’s
first youth radio start-up ‘Kiss FM’. The regulator thwarted Emap by preventing
the transformation of Kiss FM into a mainstream music station, yet the
company went on an acquisition spree buying local radio in the 1990s,
creating a whole new division that offered no obvious synergies with its
existing print businesses.
In recent years, Emap has extended some magazine brands to new platforms,
but this has produced a slightly scattershot portfolio that betrays the tardiness
of the strategy. For example, ‘Smash Hits’ magazine had existed since 1978,
but was only launched as a digital TV station in 2001 and as a digital radio
station in 2003. Emap closed the magazine in February 2006 due to falling
circulation but, confusingly, the brand’s TV and radio services continue.
Similarly, Emap launched ‘Heat’ magazine in 1999 as a pioneer of celebrity

4. content in print, although the brand was only extended to a digital radio station
in 2006 and to the heatworld.com site in May 2007.
In an attempt to combat these shortcomings, Emap announced to staff in early
2007 a far-reaching internal re-organisation (codenamed ‘Magazines 2010’)
under which the existing silo-based structure will be replaced with a multi-
platform team for each brand that will produce content for print, online and
mobile. This change will contribute substantially to the annual £20 million cost
savings promised for the group from 2008/09, with the magazine staff being
reduced by 20%. Additionally, Emap has made several key management
appointments that will help it integrate the new strategy across key parts of its
business. However, Emap needs to move quickly to fully integrate its divisions
in order to pre-empt private equity or its competitors from trying to acquire the
healthier parts of the group.
Emap Radio
Last year, Emap’s radio portfolio experienced flat revenues and operating
profit on a like-for-like basis, and the division’s operating margin fell from 23%
to 21% year-on-year, at a time when the commercial radio sector as a whole
remained in decline. The first full-year contribution of the Scottish Radio
Holdings stations (acquired in August 2005) helped divisional revenues
increase from £141 million to £164 million, and operating profit to increase
marginally from £33 million to £34 million. However, group finance director Ian
Griffiths admitted that “there is going to come a point where we can’t continue
to out-perform the market by the 5 to 6% margin that we have done over the
last three years”.
Emap’s investment in the sales, marketing and programming operations of its
flagship London stations – ‘Magic FM’ and ‘Kiss FM’ – failed to produce
revenue growth in the market last year, according to Griffiths, who said that
Kiss had “struggled” while Magic had met advertiser resistance to a rate card
increase. Despite the continuing losses of audience and revenues from former
market leader ‘Capital FM’, competitors such as Emap have gained little
ground in the face of stiff competition for listeners from BBC radio (see
Commercial radio: out of tune with London [2007-44e]).
Table 6
Radio station rankings in local markets

5. [Source: RAJAR]
The situation is worse outside of London, where Emap’s ‘Big City’ stations
(which, like ‘Capital FM’ in London, had been market leaders during the
1990s) have lost substantial market share. Emap’s losses are not so much the
result of audience fragmentation, nor of cannibalisation within the commercial
sector, but more so of increasing consumer preference for national BBC
networks over local commercial stations.
Table 7
Emap radio performance: share of all radio listening
* Prior to EMAP acquisition in August 2005
[Source: RAJAR]

6. Despite these significant losses in audience for its local heritage stations,
Emap has managed to increase its total share of commercial radio listening
from 6.9% to 10.1% over the last seven years (and its share of commercial
radio listening from 14.7% to 24%). This has been due to several
developments: its acquisition of the Scottish Radio Holdings stations, the
successful launch of rock music station ‘Kerrang!’ in the Birmingham market in
2004, and its foresight in 2002/03 to launch five, digital-only stations on the
Freeview platform. The rapid consumer take-up of Freeview has given Emap
a significant lead in listening to commercial digital-only radio stations from the
outset. Its rival GCap Media, which ignored Freeview and instead committed
itself solely to the DAB platform, has seen listening to its digital stations grow
considerably slower, as penetration of DAB receivers has reached only 19.5%
to date, compared to 30.4% for Freeview [RAJAR Q1 2007 (DAB is % of
adults); Ofcom/GfK Q4 2006 (Freeview is % of households)].
Table 8
Digital-only radio stations: platforms and listening
[Source: RAJAR; BBC World Service & Asian Network include localised analogue listening]
Emap has pledged to “re-launch, strengthen and extend” its national radio
brands, whilst at the same time creating “innovative, more differentiated radio
around specific music genres, moods, lifestyle or attitude”. For example, Heat
magazine, which was launched as a digital radio station in 2003, will now use
the same editorial team to produce audio, print and online versions. This will
enable it to offer considerably more innovative content than the back-to-back
music that has become the currency of so many digital radio stations. Such a

7. creative move could reinvigorate the consumer market for digital radio, which
is in danger of being dominated by listening to the BBC, as has already
happened in analogue radio. The biggest challenge faced by Emap (and its
competitors) remains the monetisation of digital radio listening, when digital
radio audiences are as yet relatively small, and analogue radio looks likely to
remain the dominant platform for many more years.
TV
Revenues from Emap’s eight digital music TV stations were up £3 million last
year to £27 million year-on-year, although operating profit remained at £7
million and operating margin fell from 29% to 26%. Emap’s ‘The Hits’ channel
has benefited immensely in recent years from the growing consumer take-up
of Freeview, where its only direct competitor is MTV’s ‘TMF’ channel.
Although the press reported in February 2007 that a joint venture between
Emap and Channel 4 for a “cross-platform music strategy” was imminent, no
official announcement has followed [The Guardian, 26th February 2007]. It
was anticipated that Channel 4 might re-brand one of its digital channels
‘4Music’ which, combined with Virgin Media’s expected entry into the market
with the launch of its own music channel, would increase the competition
within the music TV sector considerably. As with radio, Emap’s early decision
to acquire a Freeview TV slot has given it a considerable head start, but it is
now likely to face more competition for both audiences and revenues.
The future for Emap
In summary, the lack of evident synergy within Emap between both its radio
and B2B businesses and the rest of the group, alongside the current (belated)
implementation of the ‘Magazines 2010’ strategy, only serve to further fuel
intense speculation about a break-up. Despite chairman Cathcart’s insistence
that “the numbers [for break-up] don’t work so spectacularly at the moment”, it
is evident that the greater part of Emap’s businesses have been developing in
isolation as far back as the group’s first diversification activity in 1990. As a
result, rationalisation of its 171-strong portfolio of brands now seems
inevitable.
In our opinion, the rapid growth in the B2B division alone makes it increasingly
inevitable that Emap will be broken into parts for sale. Recent valuations of
Reuters, Dow Jones and Datamonitor amply illustrate the premium price of
information media, making interest likely from a trade buyer such as United
Business Media, or perhaps even more likely from private equity. Bidders for
Emap’s consumer magazines could include Hachette, Mondadori or
Bertelsmann, though private equity could be attracted here too. The success
of Grazia demonstrates that Emap can still connect with consumers when it
gets the formula right.
Emap’s radio assets are unlikely to find a single UK trade buyer at a time
when so many properties in the sector are already on the market (Virgin,

8. Tindle, Macquarie). Before his departure, Moloney had reportedly discussed a
possible merger of Emap Radio (which accounts for a 24% share of
commercial radio listening) with the sector’s largest player, GCap Media (31%
share) [The Times, 21st June 2007]. Ofcom considered such a possibility in
November 2006 and concluded that, under the current regulations, an
Emap/GCap merger would necessitate the divestment of at least six analogue
services, one digital multiplex and 19 local digital services. Subsequently,
GCap has acquired control of 18 analogue stations from UBC Media, which
would require even more divestments. The combined group’s potential 55%
share of the commercial radio sector would also necessitate approval from the
Competition Commission. Alternatively, Emap’s substantial portfolio would
offer an excellent opportunity for the entry into the UK radio market of an
overseas media company such as Lagardère or CanWest Global, although
significant investment would be necessary to turn around many of the group’s
provincial stations.
In all, we believe Emap may yet pay a higher price for having prolonged its
move into the digital age while growing its B2B businesses. Cathcart noted in
May 2007 that “the group has got to be repositioned for growth,” and some
recent strong appointments are a very encouraging sign in that direction. The
question remains whether this belated commitment to ‘repositioning’ will
demonstrate sufficiently that Emap is operating a fully integrated business. If
not, Emap is unlikely to survive intact.
[First published by Enders Analysis as part of report 2007-56.]
© 2007 Grant Goddard
Published by Radio Books
http://www.radiobooks.org
http://www.grantgoddard.co.uk