Love is in the airwaves as radio romances blossom

SMG's sale of shares in rival media group prompts talk of a shake-up in the UK's recovering radio sector

They have danced and occasionally they have snogged, but radio companies have yet to consummate any meaningful marriages despite years of gossip that someone was about to tie the knot.

But the past week has suddenly seen some action with Emap buying 28.8 per cent of Scottish Radio Holdings (SRH) for £90.5m and the Wireless Group, run by ex-Sun editor Kelvin MacKenzie, hoovering up smaller rival Forever Broadcasting for £8.1m. Shares in the sector jumped this week as takeover speculation frothed once again but this time with more conviction than ever.

So why has the stock market suddenly tuned in to radio once again and which of the broadcasters is likely to pounce next?

The chartsummarises the cost savings and regulatory hurdles of possible merger permutation between the biggest radio companies. Read down for a company and then across to see how a merger with any other company might stack up.

Expectations of radio mergers in the next 12-18 months are driven partly by the prospects for radio advertising that are on the up. All the big players reported a positive outlook in their fourth quarter 2003 updates. The regulatory regime has also changed. The new Communications Act abolishes many restrictions on media ownership and has ushered in deals such as the merger of Carlton and Granada, a deal the Competition Commission allowed through even though the new ITV plc controls more than 50 per cent of television advertising. This has encouraged radio executives that the regulators will look kindly on their own deals.

However, when David Wormsley, the hyperactive investment banker at Citigroup, was asked to sell the SRH stake, his job was somewhat simpler than our chart might suggest. He had just two names on his list of likely buyers; Tom Maloney, the chief executive of Emap, and Roger Parry, the chief executive of Clear Channel International, the US-owned media giant.

Mr Wormsley had been asked to sell the stake by SMG, the financially distressed Glasgow media group that was in a rush to sell its stake in its Scottish rival to keep its creditors happy and cut its debt to £150m.

He knew Emap and Clear Channel could afford the asking price and neither would face any regulatory problems. When Mr Wormsley made his calls last week it was soon made clear to him that Clear Channel was only interested in full control of SRH and that £90.5m for 28.8 per cent, with no seat on the board, was too expensive. Emap, on the other hand, saw the deal differently. It puts radio right at the heart of its business strategy - it already owns Kiss and Magic - and would be in pole position when the rest of SRH comes up for sale. Industry observers believe Emap will eventually buy the rest of SRH but that a full bid for the company was too complicated to complete in time to meet SMG's tight deadlines to raise emergency cash.

A move by Emap to complete the transaction will prove significant for two reasons. First it closes out some of Emap's fiercest rivals for dominance in Britain's biggest cities, where advertisers will pay top rates for airspace. Secondly it will be seen as the deal that broke the ice and forced more reluctant partners to get together.

Richard Huntingford, the chief executive of Chrysalis, which owns Heart FM, the station that recently took over Capital Radio's top spot in London's radio market, said: "This [the Emap deal] is scene one, act one in the consolidation drama. But I would be amazed if we were sitting here in November or December without some further significant action having taken place."

Whoever owns SRH owns the Glasgow and Edinburgh radio markets. This makes sense for Emap, which already has a big presence in London, Manchester, Liverpool and Leeds and extends the company's coverage to Scotland's main markets. "What counts with advertisers is how big you are in the big city markets," one radio chief executive said.

The obvious loser from Emap's move would seem to be Capital Radio. It has a big FM presence in London and Birmingham, and an AM station in Manchester. Glasgow and Edinburgh would have expended its empire neatly. Some analysts believe Capital might have faced competition issues with SRH because it already owns a Scottish radio station called the Beat, that covers Scotland's central belt between the two main cities. However, others suggest there is plenty of competition in that region already.

Anyway, David Mansfield, the Capital chief executive, must now ponder other options. It seems likely his shareholders will back him when it comes to making a move, the question is what? The obvious deal would be to buy GWR, which the chart shows would face minimal competition issues and generate useful cost savings.

GWR brings with it Classic FM, the biggest national commercial station and a plethora of smaller regional stations. The unknown with GWR is its biggest shareholder the Daily Mail and General Trust, which owns 29.9 per cent. Until Monday many had thought DMGT was hell bent on buying the Telegraph Group, but now those newspapers could end up under the control of the Barclay Brothers, its attention may return to radio.

One possibility is DMGT buying the rest of GWR and then bidding itself for another major player, such as Capital which would cost about £600m. GWR's local stations might upset the competition authorities when combined with DMGT's local newspaper empire, but these local radio stations could easily be sold off.

So what next in the radio marriage stakes? A shrewd guess is more fire sales by SMG. Although it sold its newspaper division for £216m last April this was not enough to shore up its finances and analysts are not convinced the £90.5m SRH stake sale will prove its last disposal.

SMG owns 100 per cent of Virgin Radio, an AM and FM licence with a 2.8 million audience. Capital would love to buy it but so too would Chrysalis. The battle between these two London-based radio groups could be about to get a lot more intense.