Capital acquires Virgin Radio

Cathy Newman

Capital Radio yesterday moved to position itself for the pending digital radio battle with the BBC by acquiring Virgin Radio, which was founded only four years' ago by Richard Branson.

Some City analysts, however, believed that Capital had paid a high price for Virgin's two commercial stations, Virgin AM, which broadcasts nationally, and the London rock station, Virgin FM. Assuming debt of pounds 22m, Capital's investment amounts to almost pounds 90m and equates to almost five-and-a-half times revenue.

One analyst said: "Capital does have a phenomenal track record in radio. If anyone could do this deal and get away with it, Capital could."

However, other analysts were relieved that Capital had decided to consolidate its hold on the radio market. The company's diversification into restaurants with the purchase of the My Kinda Town chain last year had caused concern.

Lorna Tilbian, media analyst at Panmure Gordon, said Capital had paid a "very full" price, but she added: "Strategically, Virgin fits in well. It's in Capital's heartland."

Capital is funding the deal entirely in shares. Virgin will be issued with11.87 million Capital shares, giving it a 14 per cent stake in the enlarged group. Mr Branson will join Capital's board as a non-executive director.

Richard Eyre, managing director of Capital, claimed that the deal was "good news for listeners, regulators and advertisers". Mr Branson said the merger allowed both companies to challenge the BBC's "dominance" of digital audio broadcasting .

Virgin AM, in common with the other two national commercial stations, is guaranteed a digital licence next year. Some observers, though, have been underwhelmed by the prospect of digital radio, which, although providing CD-quality reception, does not allow for an increase in the number of stations.

Capital will also seek "further co-operation" with Mr Branson's other business interests, including his overseas radio operations which could eventually be absorbed into Capital.

Cost savings from yesterday's deal will be made by moving Virgin from its location in Golden Square in London's West End to Capital's offices in Leicester Square.

David Campbell, chief executive of Virgin Radio, and Andrew Mollett, the financial director, will leave but will remain with Mr Branson's Virgin Media Group - the newly formed umbrella company which controls Virgin Net, Virgin Radio International, and Virgin Television. Mr Campbell is to work on a digital television project which will launch at the end of the year.

Capital is to change the emphasis of the Virgin stations to attract less mainstream and more male listeners. It will also create a distinct London rock station on the FM service.

Capital will sell airtime for its own and Virgin's stations. As a result, it will withdraw from Media Sales & Marketing, the radio sales house it acquired in 1989. Stations owned by Emap and GWR and currently sold by MS&M will as a result have to seek alternative representation.

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