News story about continuing battles for the acquisition of UK national commercial radio station 'Virgin Radio' and Richard Branson's power to veto the station's brand name, written by Grant Goddard in February 2005 for The Radio Magazine.

1. NEWS: ACQUISITION BATTLE
FOR 'VIRGIN RADIO'
CONTINUES, THOUGH BRANSON
CAN VETO BRAND NAME
by
GRANT GODDARD
www.grantgoddard.co.uk
February 2005

2. Richard Branson has become involved in the battle for Virgin Radio’s future
between its present owner Scottish Media Group [SMG], its largest
shareholder ITV, and Lord Ali, who wants to buy the station. Despite Branson
having sold the station to Chris Evans’ Ginger Media eight years ago, there is
apparently a change of control clause in the contract that requires any new
owner to obtain approval for the continued use of the 'Virgin' name from
Branson’s Virgin Group.
Former EMAP Radio boss Tim Schoonmaker has emerged as a potential
bidder for Virgin Radio, with backing from private equity group HG Capital,
should the station be auctioned by SMG. Schoonmaker resigned from EMAP
in 2003 and subsequently took the post of chief executive of Odeon Cinemas,
but quit last October after the business was sold to a City financier. HG Capital
has completed several media deals, including the acquisition of music
publisher Boosey & Hawkes in 2003 for £40m. Asked about its bid, Nick
Martin, HG Capital director of media, would say only: “We are one of only three
equity groups that focus on mid-market media companies [along with 3i and
Veronis Suhler Stevenson]. It would be strange if we were not actively involved
in all the deals of this size.”
Lord Ali is now thought to be preparing an increased bid of £110m, after his
first two offers to SMG of £100m for Virgin Radio were rebuffed. An alternative
plan is also under discussion, whereby Lord Ali, backed by venture capitalist
3i, would make an offer of more than £500m for the whole SMG operation, and
would then sell its TV franchises 'Scottish TV' and 'Grampian TV' to ITV. Any
potential buyer of SMG would also assume its pension deficit of £62.8m,
mostly attributable to its TV operations. An ITV insider played down the
likelihood of it participating in the break-up of SMG: "As a shareholder, we
obviously take an interest in this situation, but it’s not really a priority at the
moment. It would be misleading to suggest that we are about to help Ali break
up SMG."
Lord Ali has continued to be blunt in his public statements about SMG’s
failings: “I've had an eye on Virgin for a little while. I've watched it go through
various machinations. About six to eight months ago, I realised it really wasn't
going anywhere under SMG. I saw a marked decline in listening hours and the
valuation wasn't just moving down, it was tumbling ... and it's just going to
continue to fall.” He cannot understand why SMG refuses to accept its
shortcomings: “They think it's done well under SMG and they had a huge plan
to rebuild Virgin. I held my tongue [but] I thought ‘this is not right’. They are
turning down this offer for no good reason. I'm not even sure they took it to the
board. At that point, the only option left was to put pressure on through the
company's shareholders. This is in the shareholders' interests. That's how we
got to where we are now.”
Financial analysts expect that Anthony Bolton, a fund manager at Fidelity that
holds a 10% stake in SMG and an 11.5% stake in ITV, will play a substantial
role in proceedings. Bolton’s nickname in the City is 'the quiet assassin'
because of the way he ousted Michael Green as chairman designate of ITV in
2003. If Fidelity believes the sale of Virgin Radio is inevitable, it could extract a
News: Acquisition Battle For 'Virgin Radio' Continues, Though Branson Can Veto Brand Name Page 2
©2005 Grant Goddard

3. higher price through an auction. But a wider auction of all SMG assets would
enable ITV to buy the company’s two TV franchises at a low price, which would
conversely not benefit SMG shareholders, including Fidelity. SMG has already
suffered the embarrassment of selling its stake in Scottish Radio Holdings for
£90.5m, realising a £57.5m loss, and is unlikely to want to humiliate itself to
shareholders further by selling Virgin Radio at less than half the £225m price it
paid to Ginger Media in 2000. In SMG’s books, Virgin Radio has only been
written down to £160m. Asked whether SMG had consulted Fidelity before
rejecting Lord Ali’s offer, a Fidelity insider told the Sunday Herald: “Why didn’t
they tell us? They never tell their shareholders anything. Their communication
with shareholders has been appalling. Ever since former chairman Gus
Macdonald left in 1998, SMG has been one of the most poorly managed
companies in Britain.”
Asked what he would do for Virgin Radio if his bid succeeded, Lord Ali said:
“There are three things you have to do. Firstly, look at the programming and
the talent on the show. Secondly, the marketing; and, thirdly, get the
advertising sales proposition properly focused. It [SMG] is weak in all three
things.” Asked about the possibility of Chris Evans being re-hired, Lord Ali
answered: “I saw him at the Brits but I don't think he'd want to be back on
Virgin. But he is involved because he's a shareholder in SMG.”
It emerged this week that Lord Ali’s overture to SMG started in mid-December
2004 when he and 3i director Chris Williams met SMG chairman Chris Masters
at Edinburgh Airport’s Hilton Hotel. After Lord Ali outlined his proposal of a
£100m cash bid for Virgin Radio, the three men shook hands and parted
amicably. But once Masters had rejected the offer without apparently
consulting SMG shareholders, Lord Ali went public with his intentions. He
explained: “They believe that if they say no aggressively enough, nobody’s
going to come after them and say, ‘hang on, take a look at your track record’.
Public companies cannot behave in that way. You are not owners, you are
there to benefit your shareholders. I am not going to be bullied into keeping
quiet because it suits them. I am quite happy to stand my ground and justify
my price.”
Two investment banks issued research notes on SMG last week. Bridgewell
suggested that “a consortium bid to break up the business clearly could occur.”
Merrill Lynch upgraded SMG shares from a 'sell' to a 'neutral' rating, said it
anticipated “much delicate negotiation” ahead for Virgin Radio, and increased
its valuation from £100m to £125m. Its note said: “We believe SMG
management will not feel the need to consider bids below their own estimates
[of its worth] unless persuaded by shareholders.” Merill Lynch’s increased
valuation reflects its belief that an existing radio group might want to buy Virgin
Radio to be “able to utilise synergies with its existing business”. Lord Ali
recognises the possibility of being out-bided by a group such as EMAP or
Chrysalis: “If someone comes in and says ‘here’s £130m in cash’, well good
luck to them. You can’t bid against someone with a mad bid.”
Some industry commentators have suggested that Lord Ali’s strident
comments about SMG could apply equally to other radio owners who seem
News: Acquisition Battle For 'Virgin Radio' Continues, Though Branson Can Veto Brand Name Page 3
©2005 Grant Goddard

4. News: Acquisition Battle For 'Virgin Radio' Continues, Though Branson Can Veto Brand Name Page 4
©2005 Grant Goddard
eager to blame everyone other than themselves for their stations’ falling
ratings and declining revenues. Lord Ali is unrepentant about SMG: “There are
lots of excuses but, in the end, the talent that’s on there is not good enough.
You have to fix the programming. You have to fix the marketing, and then you
have to work hard at the advertising proposition. They are soft in all three
areas.”
A financial journalist who bumped into SMG chairman Chris Masters last week
at an Edinburgh restaurant reported that “while he would not talk, he did not
look like a man under siege.”
[First published in 'The Radio Magazine' as 'Schoonmaker Enters The Fray' & 'Clause Makes Branson The Key', #672,
26 February 2005]
Grant Goddard is a media analyst / radio specialist / radio consultant with thirty years of
experience in the broadcasting industry, having held senior management and consultancy
roles within the commercial media sector in the United Kingdom, Europe and Asia. Details at
http://www.grantgoddard.co.uk