Analysis of the dismal performance of the United Kingdom's largest commercial radio group GCap Media plc, created earlier in 2005 from the doomed merger of Capital Radio Group plc and GWR Group plc, and (correct) prediction that it would soon become a takeover target, written by Grant Goddard for Enders Analysis in November 2005.

1. GCAP MEDIA
GRANT GODDARD
November 2005

2. ExecutiveSummary
GCap Media – formed earlier this year from the merger of GWR plc and
Capital Radio plc, the industry’s two former heavyweights – reported its first
financial results last week. Chief Executive Ralph Bernard’s comment that the
results were “extremely disappointing” can only be described as an
understatement of the challenges facing the new group. On a like-for-like
year-on-year pro forma basis, revenue was down 11%, operating profit was
down 27% and pre-tax profit fell from £17.3 million to £12.4 million.
GCap owns one national radio licence, 55 local radio licences and 100 digital
radio licences. It has however announced the disposal of nine local radio
licences, as these “fall outside our key geographic regions”. The sale will
permit GCap to deliver on the promise of a dividend of 18.5p it made to
shareholders at the time of the merger, although the dividend itself for the
current year has been revised down to 9.3p. GCap will also extend the 18.5p
guarantee for a further year. We believe that while, in the short term, such
actions might satisfy shareholders’ expectations, in the long term such a
strategy of asset realisation is not in the group’s interest.
Bernard outlined “a plan of action which will revitalise GCap, particularly
Capital Radio, and return it to growth”, suggesting that the Group has
identified its difficulties as lying with Capital Radio. Although the deal was
described as a merger, GWR effectively acquired Capital Radio, and the two
managements have clashed ever since. GWR is now however firmly in
control.
Our view is that GCap Media’s problems run considerably deeper than the
London station alone and include:
• Weak advertising outlook due to cyclical economic factors (as noted in E-
Recruitment and Regional Newspapers [2005-16]);
• Commercial radio audience share decline in favour of the BBC (as noted in
UK Commercial Radio [2005-21]) at most GWR and Capital Radio
stations.
Although the weak advertising outlook is external to the Group, the audience
share decline is true of both the former GWR operation and Capital Radio.
Our view is that GCap needs to address the programming weaknesses –
driven by aggressive cost-cutting – that have largely removed the ’local’
flavour from local commercial radio stations, driving listeners away and hence
advertisers. This will require a much more substantial programme of drastic
action than the Group has announced to date. Pressure could eventually
come from GCap’s largest shareholder, Daily Mail & General Trust, which
controls a 15% stake.

3. Results Overview
GCap Media’s interim results for the half-year ended 30th September 2005
were eagerly anticipated, being the first financial data since the radio group’s
formation earlier this year from the merger of the industry’s two largest
players, GWR plc and Capital Radio plc. GCap owns one national radio
licence, 55 local radio licences and 100 digital radio licences.
Chief Executive Ralph Bernard’s comment that the results were “extremely
disappointing” can only be described as an understatement of the challenges
facing the new group. On a like-for-like year-on-year pro forma basis, revenue
was down 11%, operating profit was down 27% and pre-tax profit fell from
£17.3 million to £12.4 million.
Table 1
GCap key financial indicators, 2004-2005
Apr-Sep
2004
Apr-Sep
2005 Change
Revenue £125.3m £111.6m -11%
Operating profit £20.1m £14.7m -27%
Pre-tax profit £17.3m £12.4m -28%
Earnings per share 6.6p 4.5p -32%
[Source: Enders Analysis]
Shareholders were anxious to learn whether GCap could deliver the 18.5p
full-year dividend promised them at the time of the merger. The answer is both
yes and no. While the dividend itself for the current year has had to be revised
down to around 9.3p, it will be supplemented both in 2005 and 2006 by a
distribution of cash proceeds from the sale of nine radio stations, thus
extending the 18.5p guarantee for a further year. While such actions might
satisfy shareholders’ expectations in the short-term, a strategy of asset
realisation is not in the group’s longer-term interest, despite GCap’s
justification that the nine stations to be sold “fall outside our key geographic
regions”.
The interim results revealed the outcome of GCap’s first strategic review that
outlined “a plan of action which will revitalise GCap, particularly Capital Radio,
and return it to growth,” according to Bernard. This focus on GCap’s flagship
London station, as if it were the group’s dominant problem, has to be viewed
in the context of the power struggle that has preoccupied senior management
in recent months.
Although the formation of GCap has commonly been referred to as a ‘merger’,
in fact the International Financial Reporting Standards define the deal as the
acquisition of GWR by Capital Radio. Initially the chief executives of both
companies were appointed jointly to manage the new group but, by
September, former Capital CEO David Mansfield was ousted, leaving former
GWR CEO Ralph Bernard to rule the roost. What swiftly followed was a purge
of most former Capital senior executives, replaced largely by former GWR
staff. In October, the Annual General Meeting returned a new Board of

4. Directors that comprised seven former GWR directors, five former Capital
directors and one unconnected to either group.
With GWR now firmly in control, it has become politically expedient to credit
much of the group’s poor performance to Capital Radio. GCap Operations
Director Steve Orchard, a former GWR executive whose appointment to the
main board was also announced, went so far as directly to blame former
Capital Radio executives who he said had been “overwhelmed” by the
station’s problems, while he heralded the arrival of GWR executives who
would provide an “outside perspective” on what was going wrong.
Our opinion is that GCap Media’s problems run considerably deeper than the
London station alone; that these problems arise as much from the former
GWR operation as from Capital Radio; and that all require a much more
substantial programme of drastic action. The main issues the group faces are
as follows:
1. Advertising revenues
The outlook for radio advertising is far from encouraging. Last month, the
Advertising Association revised its estimate for 2005 industry revenues to a
1.5% decrease year-on-year at current prices. In September, it had forecast
radio revenues would grow next year by 3.4%, although this too is likely to be
revised downwards as GCap has reported revenue down year-on-year by 6%
in October and 5% in November.
The unknown factor is how much of radio advertising’s current problems
derive from cyclical economic factors, and how much from the industry’s
diminishing performance against the BBC. According to RAJAR, commercial
radio currently attracts 43.5% of all radio listening, considerably down from its
peak of 51.1% in 1998, while local commercial radio, which comprises the
majority of GCap’s activity, has fared proportionately worse, currently at
33.0% down from its peak of 40.8% in 1998. GCap alone accounts for around
40% of industry revenues and 34% of commercial radio listening, giving its
own performance a substantial impact on the industry as a whole.
2. Local FM radio stations
GCap’s statement admitted that “audience figures in some core analogue
heritage stations were disappointing” but failed to reveal the extent or the
longevity of the problem. Audiences for almost all the group’s FM stations
have been in decline for several years:
• Hours listened to the Capital FM network of eight stations have fallen by
39% over the last five years, including a 51% fall at BRMB Birmingham
and a 55% fall at Capital FM London;
• Hours listened to GWR’s ‘Mix’ network of FM stations fell by 14% on a like-
for-like basis over the last five years, including a 52% fall at
Peterborough’s Hereward FM and a 34% fall at the group’s flagship West
Country station GWR FM. Only two out of the 23 ‘Mix’ stations owned by

5. GWR five years ago have shown any increase in hours listened since
then.
GCap’s statement that it “will be turning management attention to addressing
audience declines at other key heritage stations” only “following the Capital
FM (re)focus” is a case of too little attention too late in the day for structural
issues that have been in evidence for several years.
3. Local AM radio stations
Parallel to their FM networks, both GWR and Capital controlled separate
networks on the AM waveband (GWR ‘warehoused’ its Classic Gold stations
to UBC in 2000 to comply with regulatory restrictions, but continues to sell the
network’s advertising and include the network’s audiences in its GCap data).
Hours listened to the Capital Gold network have fallen by 48% over the last
five years, while hours listened to the Classic Gold network fell by 51% on a
like-for-like basis. Only one of the 21 AM stations owned by GWR or Capital
five years ago has shown any increase in hours listened since then, while
several have suffered losses of more than 70%.
While the industry prefers to paint these declines as inevitable and a result of
the public’s dwindling preference for listening on the old-fashioned AM
waveband, our opinion is that at least part of this fall is due to the innovative
programming changes introduced by BBC Radio Two, targeting the same
demographic.
While commercial AM stations have tended to persevere with the same
narrow playlist of well-worn ‘oldies’, Radio Two has incorporated less well-
known songs from previous eras, contemporary album tracks and emerging
artists into its music mix, alongside substantial speech content.
4. Digital stations
GCap’s success in attracting audiences to its digital stations has been
derisory compared to competitor EMAP. Out of all digital stations whose
audiences are measured by industry body RAJAR, GCap owns four of the six
that attract the least hours listened. Two of these four digital stations are
available on the only national commercial digital network (owned by GCap)
but each reach only around 100,000 adults each week, compared to EMAP’s
audiences of up to one million.
GCap’s lone digital success story is Planet Rock, attracting 341,000 listeners
a week. Too many of its other digital brands seem to have simply been
‘parked’ on digital multiplexes with a minimal investment in their programming,
and with the effect of preventing competitors’ stations with similar formats
usurping their prime location (the regulator measures programming diversity
by the availability of a format on a multiplex, rather than a station’s ability to
connect with an audience).

6. Assessment
Our opinion is that GCap’s strategic review is incomplete without a specific set
of actions to counter each of these issues.
The underlying problem appears to be that GWR, now in the GCap driving
seat, has almost no track record of station turnarounds in competitive
markets. From its very beginnings, GWR was founded on the simple notion
that ‘bigger is better’ and, since 1985, its remarkable growth has been driven
purely by acquisition.
In an industry where almost all costs are fixed, whilst revenues are almost
infinitely variable, GWR cut costs to the bone at acquired stations by
networking programmes as much as possible, providing ‘local’ news from
regional ‘hubs’ and homogenising programme styles and music playlists.
Substantial investment in state-of-the-art technology has enabled
programmes on GWR-owned stations to sound live and to include local
references, even if they are pre-recorded and produced in another part of the
country. At the same time, the sheer volume of listeners attracted to GWR
stations enabled the company to sell a greater proportion of national
advertising across the combined output of its soundalike stations that target
the same demographic.
Whilst these strategies have succeeded in reducing costs and increasing
revenues, they have also disconnected these local stations from both their
local audiences and their local advertisers as was noted in UK Commercial
Radio [2005-21]. In Ofcom’s recently published market research (‘Radio –
Preparing For The Future: Phase 2’, Appendix A), the word ‘local’ appears in
two of the top four reasons that people say they listen to the radio. GWR has
succeeded in extracting most of this ‘localness’ out of local radio, and
replacing quirky, individualistic, almost parochial local programmes with a
predictable, anodyne quality that is technically clever but lacking in ‘soul’.
At the same time, rapacious acquisitions have enabled GWR to exert a
considerable stranglehold over local advertising markets. In the Competition
Commission’s 2002 decision that prevented GWR from purchasing a further
West Country station, it noted that GWR already exerted control over 77% of
local radio advertising revenue in Bristol and Bath, and 84% in Taunton and
Yeovil.
Notably, the word ‘programme’ appears only once within GCap’s 10,000-word
announcement. Whereas BBC Radio Two’s success has been built upon the
ability of individual programmes hosted by very disparate personalities to
touch the heart of listeners, GCap has followed the opposite route by
producing streams of ‘programming’ with little distinction provided by the
presenter, the time of day or location of the station.
Until now, GWR shareholders have been able to ignore the company’s
underlying business philosophy, content with the fact that its top-line figures
grew bigger and bigger every year with more and more acquisitions. But now

7. that GCap is the largest star of the industry, and acquisitions are no longer an
option, the creaking underbelly of the business has been exposed for the first
time. Commercial radio’s raison d’être is to sell listeners to advertisers, so that
the current precipitous falls in both listeners and advertising revenues spell
the kiss of death for GCap.
Of the estimated cost savings of £25 million per year from the merger, GCap
promises that £3.7 million will be redirected to “investment in marketing and
staff at local radio stations”, although no specific mention is made of
investment in programme content or the re-engagement of local staff to
present live shows. The fact that GCap lists a “survey of listeners’ views” as
one of its three key projects for the coming year merely underlines how little
attention has been paid until now to the audiences’ views on station content.
To expect the GWR-driven GCap to declare that its future strategy will focus
on putting the ‘local’ back into local radio would be akin to exposing the
Emperor’s new clothes.
Instead, several of the policies that GCap has proposed as a result of its
strategic review appear little more than damage limitation while the house is
burning down:
• The ‘groundbreaking’ proposal to cut the volume of talk on Capital FM and
never to play more than two commercials in a row is a throwback to the
success of offshore pirate station Laser 558 in the mid-1980s, whose
slogan was “never more than sixty seconds away from music”. Without the
benefit of a marketing campaign, Laser’s no-nonsense strategy decimated
audiences of both local commercial stations and BBC Radios One and
Two, until the government was persuaded by industry lobbying to take it
off-air.
• The reduction in advertising minutage on Capital FM by up to half during
weekday daytime is precisely the same ‘less is more’ strategy
implemented by the largest US radio group Clear Channel in January 2005
after it too lost listeners following industry consolidation.
• The re-branding of Beat 106 in Scotland and digital station The Storm as
Xfm is a belated acknowledgement that both stations have failed to
connect with audiences (The Storm has only 76,000 listeners a week).
• The merger of Capital Gold with Life similarly acknowledges that Life’s
60,000 listeners per week is an abysmal performance for a national digital
station.
Assuming that Ralph Bernard has no desire to play the part of the Emperor,
our expectation is that the GCap business will continue to flounder. Only once
the share price has fallen further to a more realistic valuation will the company
begin to look like a suitable acquisition target to predators. Even then, the task
of turning around a business that has uncoupled its product to such an extent
from local audiences and local advertisers will prove daunting for any new
owner.
Much depends upon the attitude of GCap’s largest shareholder, Daily Mail &
General Trust, which controls a 15% stake. Until now, it has been a long-term
investor in GWR and a staunch supporter of Bernard’s strategies. It could

8. decide the time is right to entertain acquisition offers from private equity
companies or overseas media groups for the whole company, or it could opt
to acquire the remainder of GCap itself to add to its highly successful radio
business in Australasia. Alternatively, it might be happy to witness the break-
up of the company and purchase a profitable asset such as national station
Classic FM that would fit neatly with its UK newspaper brands.
A year ago, prior to the formation of GCap Media, Bernard explained his
strategy for the development of digital radio:
“We, the industry, have built the infrastructure. We are now getting the
sets in the market. The building blocks are in place. And I know you
can say this is arse-about-face, but the last thing is content.” (The
Independent, 20th December 2004)
Someone should have done Bernard a big favour and bought him a sign that
Christmas to hang in his office that said: “It’s all about the content, stupid!”.
[First published by Enders Analysis as report 2005-23.]
© 2005 Grant Goddard
Published by Radio Books
http://www.radiobooks.org
http://www.grantgoddard.co.uk