The Scottish players

It's been a torrid few weeks for SMG – also known as Scottish Media Group – what with the noisy departure of Chris Evans from Virgin Radio, suggestions that it paid over the odds when it purchased Ginger Media two years ago, and an ever-present market threat from predatory rivals. But morale at the group remains high, while its leaders haven't ruled out a bit of predation themselves

It's not easy to do deals to get bigger in a heavily-regulated UK media industry and even harder to find a strategy that will guarantee long-term survival. That creates a conundrum for Scottish Media Group or SMG, as it is now known.

The Glasgow-based company has properties ranging from STV, Scotland's main ITV franchise, to Virgin Radio and The Herald newspaper, as well as cinema and outdoor advertising. It is indicative of the sometimes clubby, sometimes ruthlessly dog-eat-dog world of a consolidating UK media industry, that two other media groups, Granada and Telewest Communications, the cable operator, each own a 17 per cent stake in SMG.

With those question marks over the company's future ownership, SMG has moved to buy businesses either beyond the television sector or outside Scotland altogether. It acquired the Herald titles in 1998 and then a little over a year later took its biggest step yet with the acquisition of Chris Evans' Ginger Media for a whopping £225m in cash and shares.

If that made Chris Evans a multimillionaire, it also seemed to dissipate the volatile star's appetite for his early morning programme, so setting the stage for last week's ignominious sacking after the DJ seemed to prefer his Knightsbridge local to Virgin's West End studios just off Golden Square. The incident served to push SMG from the City pages to the home news headlines, and despite public relations guru Matthew Freud's best spin-doctoring, Mr Evans came out of it all looking unreliable and the epitome of the bratty loser so often ridiculed on his Virgin morning show.

Andrew Flanagan, the chief executive of SMG, with Don Cruickshank, the former director-general of Oftel and the group's non-executive chairman, could be seen to have gambled and lost with the Ginger Media deal. Gerry Robinson, the former chairman of Granada, publicly rebuked SMG for over-paying, saying: "As a shareholder, it doesn't look like value to me."

But from the vantage point ofGlasgow the rationale for the deal was simple. Publicly, SMG's bosses portrayed the move as consummate proof of the group's determination to move beyond Scotland and on to the national stage. Yet the implicit reason for the deal was to get big enough, fast enough, to resist the overtures of Granada, a predator famous for its ability to spring the takeover trap on unsuspecting prey. But SMG, like its bigger peers Carlton Communications and Granada, is no fan of the regulatory status quo. And the company, with interests in six media segments, has laid the groundwork in Scotland to eventually draw benefits of scale. George Watt, SMG's finance director, says the group has made progress in developing its ambitions, but thinks it has much further to go. "We are a cross-media company. That forms an important part of our strategy going forward. The timetable for the Green Paper [on media ownership] to appear in 2002 is pretty much what we expected. We would hope that new legislation would open the options for any UK media company to expand in the way its strategy indicated."

Like other media groups, SMG hasn't been bashful about lobbying Whitehall for change. Perhaps because most media groups, ranging from Rupert Murdoch's News International (where Mr Cruickshank was once a senior executive) to the big broadcasters and publishers, have created a clarion call for getting rid of ownership limits, the Government has chosen to move slowly. If there was disappointment with the lack of initiative shown in the Queen's Speech last month on loosening ownership rules, there is also a marked pragmatism among media company executives that change in an era of global giants such as AOL-TimeWarner and Vivendi Universal is inevitable.

"We've made our views known to the Government," says Mr Watt. "If we are to create the most dynamic media market in the world in Britain, cross-media regulations have to be reformed. To give a broad range of content and ensure competition, media companies must have sufficient scale to invest in new content, in new rights and in new infrastructure."

City experts are somewhat sceptical. Anthony de Larrinaga, media analyst with SG Securities, the investment bank, which is neutral on the company's stock, asked in a recent note: "If SMG did not exist would we create it?" He went on: "With limited opportunities to expand its core TV broadcasting activities, SMG has used the strong cashflows from its ITV licence to extend itself into a broad range of largely unrelated media activities. In normal circumstances we would expect the whole to stand at a healthy discount to the sum of its parts, although Granada's stake ahead of a possible relaxation in media ownership restrictions in the forthcoming communications legislation will no doubt sustain an element of speculative interest in the shares." Clearly, the delay of any government initiative to loosen cross-media ownership barriers leaves SMG in a delicate position. It is alternatively predator and prey, a predicament shared, oddly enough, with Granada, whose chairman Charles Allen said as much in a recently leaked letter to the Prime Minister.

But if Granada is looking over its shoulder feeling vulnerable to an unwanted suitor, what chance is there for SMG, a fraction of its size in market capitalisation, to escape being gobbled up by a UK or European rival? Asked where SMG would hope to be in three to five years, Mr Watt answers tentatively. "That's a difficult question – to look into the looking glass. We would see having a larger presence in the UK. As to the exact make-up of the group, that's a difficult one to call. It's a fluid situation, but when changes begin it can develop very quickly. But we would probably expect to have more radio."

That ambition, which became manifest with the Ginger/Virgin buyout, took another step forward over the winter as SMG, in a series of dawn raids, acquired a 29.5 per cent stake in Scottish Radio Holdings, for £150m in cash. But ambition and timing can sometimes work at cross-purposes. Though SMG can't buy SRH under current ownership rules, its intentions have been made crystal clear. Yet this is at a time when advertising volumes are suffering from their biggest slump in a decade. That's seen Virgin itself lose an estimated 15 per cent of its ad sales revenue in the second quarter, and the share price of SRH has tumbled by nearly half from a bid-induced high of 1735p in February. SMG, too, has suffered. With about 85 per cent of its sales dependent on advertising, the stock has halved in the past year, slicing its market capitalisation to £570m.

Still, Mr Watt is unapologetic about the aggressive approach to SRH which has also been a target for DC Thomson, the Dundee publisher of Beano comics and weekly newspapers, which acquired a 10 per cent stake. "When we took the stake we made a no-bid statement," Mr Watt says. "SRH is important for us strategically because it gives us a foothold going forward. For now, the stake in SRH doesn't give us anything. We have no control. We have no seat on the board. In terms of it being a strategic stake, it is something for the future."

That SMG has a clearly developed line of reasoning on why increased cross-media ownership won't be bad for advertisers or viewers is revealing. The group is said to have about 20 per of the Scottish advertising market, a figure that would rise to almost 30 per cent should SRH fall into SMG's embrace. For a start, SMG believes competition policy should govern media ownership, not specific statutes debated and approved by Parliament. And Mr Watt acknowledges that a bid for SRH would require public interest-based scrutiny by the competition authorities. "While ours are clearly strong franchises, they are not without competition. The TV interests are, after all, competing with Channel 4, Channel 5 and Sky. And competition in the newspapers is extreme. Media ownership isn't about share, but about the strands of media and whether there is competition in each strand. If we go down that road (of cross-media ownership), there will still be significant competition."

If so, that would mark a big change from the company's origins in 1957. Lord Thomson of Fleet, the media baron who then owned The Times, created Scottish Television after being awarded the Channel 3 licence serving Central Scotland, which he famously described as "a licence to print money". That it duly did, if on a modest scale relative to his other interests in publishing, retailing and oil. After coming to the stock market in 1965, the group continued as one of 16 regional Channel 3 licence-holders until the early Nineties when it began to branch out just as ITV ownership began to consolidate.

With the likelihood that broader ownership structures for UK media groups is only a matter of time, SMG is bound to be in the thick of the sector's rationalisation. Whether it emerges independent, perhaps trading TV franchises for radio stations, or is taken over outright, it seems clear that the path to British media's consolidated future runs directly through the group's historic Cowcaddens headquarters in Glasgow.

FACT FILE

Market capitalisation: £570m

Turnover: £301m in the year to 31 December 2000 (£243m in 1999)

Pre-tax profit: £35.1m in 2000 (£42.2m in 1999)

Main businesses: Scottish Television and Grampian Television franchises for Channel 3 and Virgin Radio. Programme-making interests in London and Scotland. Cinema and outdoor advertising as well as newspaper and magazine publishing

Key executives: Don Cruickshank, non-executive chairman; Andrew Flanagan, chief executive; George Watt, finance director

Employees: 1,700

FROM SCOTTISH TV TO A DASH OF GINGER SPICE

1957: Lord Thompson is awarded the Channel 3 licence for central Scotland, named Scottish Television

1965: The company floats on the stock exchange but is dwarfed by rivals

1990: Acquires Alternative SA for £4.1m, including a £3.45m deferred amount

1991: Acquires 20 per cent of Sunrise TV, now known as GMTV, the ITV early-morning operator. Also launches a one-for-one capitalisation issue. Licence extended for 10 years from 1993

1992: Creates Scottish Television Enterprises (STE) to develop and market programmes in UK and abroad

1994-95: Mirror Group and then Flextech each acquire 20 per cent stakes

1996: STV joins BSkyB to develop a Scottish news and sports satellite channel for Northern Ireland, England, and Wales. Buys Caledonian Publishing, owners of The Herald, for £120m

1997: Acquires Grampian TV, northern Scotland's Channel 3 franchise, for £105m. Changes name to Scottish Media Group. Andrew Flanagan named chief executive. Buys 18 per cent stake in Ulster TV

1998: Closes joint venture with BSkyB. Sells UTV stake and pays £32m for VCI

1999: Don Cruickshank becomes non-executive chairman. Acquires Pearl & Dean (cinema advertising) and Primesight (outdoor advertising). Mirror Group sells its stake to Granada

2000: Buys Ginger Media for £225m. Changes name to SMG to reflect its reach beyond Scotland

2001: Acquires 29.5 per cent stake in Scottish Radio Holdings for £150m in a series of market share purchases. Fires Chris Evans for absenteeism