SMG strategy in doubt as chairman heads for exit

Media group faces break up as questions are raised over the long-term viability of Scottish company's varied interests

Does a company that made a multi-millionaire of the television and radio "prima donna" Chris Evans really deserve our admiration?

SMG acquired some fantastic media assets in the boom times but many view the acquisition of Mr Evans' Ginger Media as typical of the company's strategic muddle and profligacy.

The departure, announced yesterday, of its chairman Don Cruickshank was being seen in the City as a sign that shareholders have been demanding changes.

Certainly, over the past year, we seem to have witnessed the end of the dream for the former Scottish Media Group, which set itself up as a media powerhouse north of the border and then tried to storm the rest of the UK. In recent times however, it has been sounding the retreat, with the sale of its publishing business last year and the disposal, earlier this month, of its 28 per cent stake in its rival Scottish Radio Holdings.

SMG has also come close to breaching its banking covenants twice over the past couple of years, which does not smack of a company in control of its destiny.

SMG sought to create a media group with interests across the industry's main sectors. Starting life as Scottish Television, in the 1990s it grew by acquisition, buying into newspapers, radio, television, cinema, billboards and another ITV licence. The model was Disney or Viacom. But what we ended up with was good assets but no critical mass in any one media market and a lack of clarity about its end-game.

City sources say disgruntled shareholders went to see Mr Cruickshank. Remember that the activist Fidelity has a 10 per cent stake, while the company has in the past engaged in a very public spat with its biggest shareholder, Granada.

It is unclear whether investors blamed Mr Cruickshank for the company's financial troubles and strategic confusion or wanted him to remove Andrew Flanagan, its chief executive since 1997. Mr Flanagan remains in place.

SMG would only say yesterday that Mr Cruickshank had decided to concentrate on his new job - chairing the publishing group Taylor & Francis - and would step down in the summer.

Callum Spreng, SMG's corporate affairs director, said: "Don Cruickshank has seen us through some pretty major legislative changes... The time is right, after almost five years as chairman, to hand the job over."

In many ways, things are looking up for SMG. The £90.5m sale of its stake in SRH has relieved pressure on the balance sheet and the company can now "reduce our debt and move on", as Mr Flanagan put it on announcing this transaction. And the media industry is starting to see signs of a recovery in advertising revenues after a three-year downturn. SMG is particularly highly geared to a rebound - every additional pound of revenues is translated into 80p of additional profit.

The group's remaining businesses have good positions, which are desirable to predators in a break-up scenario. But SMG maintains that its cross-media strategy remains in place and that its assets work as standalone business in their sectors.

But SMG will find that the City has not forgiven or forgotten. What many in the Square Mile find particularly troublesome is that SMG has never really acknowledged its mistakes and, very unconvincingly, tries to portray its reaction to events as a long-term strategy.

Richard Menzies-Gow, an analyst at Dresdner Kleinwort Wasserstein, said: "SMG has not had a coherent strategy for 18 months. Debt ruled what strategy it adopted." The £216m disposal of the Glasgow Herald newspaper was forced on the group by extreme balance sheet pressure. It decided to sell its publishing business after failing to get a high enough offer for its ITV franchises.

By this year, debt was weighing heavily on the company again. It sold the SRH stake for £60m less than the acquisition price this month, not waiting for a bounce-back in the radio sector's revenues. And, with the SRH interest, went a strategically significant position in the approaching radio consolidation game. The company is accused of missing out on becoming a major player in ITV and it is difficult to see how it will emerge as a sizeable radio operator.

Even after the SRH deal, SMG's debt is, at some £160m, still high and would not allow for major acquisitions. And anyway, it will take a long time before the City will trust the company to do deals again.

"The best value for shareholders is for SMG to sell more businesses, though not straight away. They need to keep their heads down and let advertising improve," says Mr Menzies-Gow.

SMG's defence is that every media company got carried away in the boom times and bought assets at inflated prices. While that is true, SMG's case seems to be fairly extreme, with the acquisition of the SRH stake, at the top of the market three years ago, seen in the City as a particularly unnecessary gamble.

Whoever is chosen as the new chairman (Michael Grade, a board member and former chief executive of Channel 4, is a possibility) will have to work some major charm in the City. The new chairman will also have to take a close look at Mr Flanagan's record.

The good news is that, should SMG decide to sell up, ready buyers would emerge for most of its assets. Virgin Radio's figures have stabilised. Talks with ITV have taken place in the past. Pearl & Dean has 40 per cent of the cinema advertising market in this country, while the billboard business could be easily swallowed up.

If SMG has an alternative to this break-up scenario, it had better start showing it.