Friday, 15 May 2009

Global Radio and TLRC: a tale of two sickies

Global Radio is the UK’s largest radio group, accounting for around 40% of all commercial radio listening. Each week, its stations are listened to by 37% of the UK adult population (18.5m persons) for an average 9.3 hours per week.

The Local Radio Company [TLRC] is one of the UK’s small radio groups, accounting for around 1% of all commercial radio listening. Its stations are listened to by 1% of the UK adult population (680,000 persons) for an average 7.6 hours per week.

In Global Radio’s accounts filed with Companies House, its auditor noted on 22 April 2009:
“… there is a material uncertainty which may cast significant doubt over the ability of the group and parent company to continue as a going concern”.

In The Local Radio Company’s accounts filed with Companies House, its auditor
noted on 5 March 2009:
“…. there remains in existence a material uncertainty which may cast significant doubt about the Company’s ability to continue as a going concern”.

Both Global Radio and The Local Radio Company had lost substantial amounts of listening to their stations over recent years. In commercial radio, there is a close relationship between the amount of listening to radio and the revenue generated by that radio listening.

The graph below shows that, between Q4 2001 and Q4 2008, the majority of stations presently owned by Global Radio lost significant amounts of market share in their local markets, particularly those in smaller markets.

The graph below shows that, between Q4 2001 and Q4 2008, the majority of stations owned by The Local Radio Company lost significant amounts of market share in their local markets, regardless of their size.

Global Radio was created from the acquisition of GCap Media and Chrysalis Radio, whilst GCap Media itself had been created from the earlier merger of GWR Group and Capital Radio Group. The graph below shows the listening accrued by the notional aggregation of these groups over time. The volume of listening in 2008 (8.9bn hours per annum) was down 24% on what it had been five years earlier. The data is not like-for-like, as it includes sundry station launches, closures, acquisitions and sales during this period.
Using sector average yields for each of these years, the Global Radio stations’ estimated revenues from advertising sales were likely to have been around £223m in 2008, down 20% on five years earlier. (The £ amounts are actual and not adjusted for inflation.)

The Local Radio Company was created in 2004. The graph below shows the listening recorded by RAJAR to its stations, which was down to 351m hours per annum in 2008. Again, the data is not like-for-like, as it includes sundry station launches, closures, acquisitions and sales during this period.
Using sector average yields for each of these years, The Local Radio Company stations’ estimated revenues from advertising sales were likely to have been around £9m in 2008. (The £ amounts are actual and not adjusted for inflation.)

Commercial radio is a largely fixed cost industry. This means that the cost of running a radio station is broadly the same whether it is listened to by 1m people or 100,000 people. This creates challenges in times when audiences are falling (as in now). Less listening equals less revenues, but it is much harder to cut costs. As a result, operating margins of radio stations tend to be badly squeezed when listening is falling. The massive investment in DAB infrastructure that the commercial radio industry has made over the last decade has squeezed its margins even more tightly.

Examination of the annual accounts of Global Radio, GCap Media and Chrysalis Radio makes it possible to estimate the revenues and operating profit of what now comprises Global Radio over the last few years. The group revenues are remarkably close to the revenue figures derived from listening data in the earlier graph.
The key assumption that produces the £6m operating profit figure for 2008 is that Global has managed to shave 10% from its operating costs year-on-year (equivalent to about £24m per annum of cuts). That is a very tough challenge in a fixed cost industry. If, in fact, Global has cut its overheads by less than 10%, the operating profit figure for 2008 would be lower (anything less than an 8% cut would transform this £6m estimated operating profit into an operating loss).

For The Local Radio Company, operating losses are de rigueur. Its annual accounts show the company’s diminishing revenues (down to £15m in 2008) and persistent operating losses. The revenue figures in the graph below are greater than the revenues estimated from listening data in the earlier graph because they additionally include revenues from a jointly owned advertising saleshouse (the two income sources are nowhere isolated within the accounts).

For both Global Radio and The Local Radio Company, as their respective auditors noted, there exists doubt about their ability to continue as going concerns. The Local Radio Company accounts, published on 4 March 2009, noted pertinently:
Revenues are down year on year and, within a fixed cost business such as broadcasting, this has a direct impact on the Group’s profitability and cash position.”
Someone had to rescue The Local Radio Company from its predicament. This week, UKRD Group reportedly acquired The Local Radio Company after a protracted struggle.

This is the point where the stories of these two radio groups diverge. By contrast, Global Radio remains remarkably upbeat about its own prospects. A series of press articles appeared this week variously entitled ‘Global Radio anticipates profits’ (Broadcast), ‘Global Radio expects steady profits despite ad slump (The Guardian), ‘Global Radio declares steady profit despite auditor’s warning’ (Brand Republic) and ‘Global Radio shrugs off warning with £31m profit’ (The Times).

In
The Times, Global Group chief executive Ashley Tabor said that in the year to 31 March 2008, revenues were £269m and profits were £31m (notionally, if Global had then owned its current assets). He admitted that advertising revenues had fallen “by double digits, between 15% and 20%” in the year to March 2009, but insisted that “underlying earnings will be roughly the same”, even allowing for a fall of about £40m in revenues. This is a remarkable assertion.

If revenues were to fall by £40m year-on-year, but earnings remained the same year-on-year, then costs too would have to fall by £40m. Basic maths. For Global to cut its overheads by £40m would require around a 17% cut to the cost base it inherited from GCap Media and Chrysalis. And this would have to be achieved within a year to maintain earnings at their same level. This is a very tall order.

Ashley insists that, for the year to March 2008, revenues would have been £269m and profits £31m. My estimates for calendar year 2007 (detailed above) were £264m revenues and £24m of operating profit. These figures are relatively close. Then there is a divergence of opinion. For the year to March 2009, Ashley seems to be forecasting revenues of £229m and profits of £31m. My estimates for calendar year 2008 (detailed above) are revenues of £222m and operating profit of only £6m.

My ‘operating profit’ figure excludes any potential, one-off gains made from radio station sales. Ashley’s ‘earnings’ figure is more likely to be pre-tax profit. I am more interested in quantifying the health of the underlying business, which is the running of radio stations. From that perspective, it is difficult to see how the future can look positive for Global Radio. As The Times
noted today: “Global probably lost money in the year to March 2009, but we will not see those accounts until next year”.

The elephant in the room is Global Radio’s cost of debt servicing. Chrysalis was acquired using £84m of debt at an interest rate of 6.125%. GCap Media was acquired with £126m of debt at an interest rate of Libor plus 3.4% (equals 4.771% today). Interest payments currently total more than £11m per annum, enough to wipe out the estimated operating profit.

If the advertising market falls further in 2009 (Ofcom
forecasts a 20% decline in radio revenues year-on-year), Global Radio will be under immense financial pressure. The Bank of Scotland (now part of Lloyds Bank) has a mortgage over Global’s assets as security for these loans. In the meantime, Global is still hoping to sell some of its local stations in the Midlands (sales required by competition law) to arch-rival Bauer Radio, reportedly for £38.8m cash. Bauer can afford to play a patient, waiting game in a buyer’s market. The longer it holds out, the greater the pressure on Global to sell. If Bauer can wait long enough, it might even be able to acquire these stations (and others) at a knockdown price from the Lloyds Bank bargain bin.

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