News that publishing, music and radio company Chrysalis Group is considering selling off its radio and music arms is expected to spark a second wave of consolidation in the radio industry.
The announcement has received a lukewarm reaction so far, with many radio insiders saying that the group has made the decision "a few years too late" and may find it difficult to find a buyer.
Chrysalis has been forced to look at the options for its radio group, which includes the Heart, Galaxy and LBC brands and is estimated to be worth £200m, after missing out on valuable acquisitions such as the Century stations and Saga Radio, which would have allowed the group to expand and develop its brands.
During the first wave of radio consolidation in 2005, the pressure mounted on Chrysalis to make a move after the GCap merger and Emap’s acquisition of Scottish Radio Holdings. It made a £115m bid for Guardian Media Group’s radio assets in April 2005 but, despite insiders claiming a deal was "almost done", it did not go ahead. It is thought that a disagreement over the price – GMG was reported to want £150m – was the sticking point.
GMG was known to be considering pulling out of radio completely, but since then the group has renewed its commitment to the medium. In October, it acquired two Century Radio stations from GCap for £60m and snapped up the Saga Radio network for £70m in December.
While GMG has been on a roll, it is now faced with integrating the new stations into its portfolio and, for this reason, has ruled itself out of acquiring Chrysalis.
But one senior radio industry source says GMG will have to consider the Chrysalis portfolio because it is a "unique opportunity" despite the difficult timing of the announcement. He explains: "It is a good fit from a regulatory point of view and it would give it incredible scale."
There is much speculation about a management buy-out led by Chrysalis chief executive Richard Huntingford and Chrysalis Radio chief executive Phil Riley. Riley reiterates the company line that it has "no pre-conceived ideas" about what will happen to the group.
However, Chrysalis would lack scale as a standalone group, meaning a merger with another group looks more likely. Another radio industry insider suggests that a merger with Emap’s radio division could be a possibility. He says: "There are rumblings at Emap about splitting parts of the business out. It could merge with Chrysalis to create a completely new, pure radio group. Both companies could take shares in it."
While no one in the industry is prepared to rule anything out at present, it is thought that such a deal would provide too many regulatory and competition issues. If Chrysalis opts to break up the group, however, there are few who doubt that Emap would look to snap up Galaxy and rebrand it as Kiss.
One analyst believes Chrysalis could get up to £130m for Heart alone. The station is number one in London and, according to the Rajar figures for the last quarter of 2006, its Jamie Theakston breakfast show is also number one in the capital.
Its strong position in the market could make it attractive to a foreign investor. Possible contenders include Canadian conglomerate CanWest, US-based media company Emmis and Australian bank Macquarie.
Riley says that there will "never be a better opportunity" to buy into UK radio. But others claim that a foreign investor or a private equity house will "struggle to make the numbers work" and will face the same problem when it comes to trying to get new growth out of the business.
The radio industry is agreed that there is a need for further consolidation. Riley says/ "It is clear that in a world of scale, commercial radio is still too fragmented. We have to find ways of strengthening our infrastructure." With Ulster TV, owner of TalkSport, and Virgin Radio parent company Scottish Media Group in talks over a possible merger, 2007 is sure to see more consolidation. But it is the Chrysalis deal that has the potential to fundamentally change the radio landscape.