Capital Radio's pounds 87m Virgin bid may fall foul of MMC advertising objections

Capital Radio may have to outsource Virgin Radio's advertising sales if the deal to merge the two groups is to get clearance from the Monopolies and Mergers Commission, according to City sources. Cathy Newman assesses the chances of the merger being cleared, and the threat from a rival bid launched yesterday by Chris Evans, the DJ.

Capital is known to have spent some time discussing the effect of its pounds 87m bid for Virgin on the London advertising market. According to City sources, the MMC investigation is likely to recommend that the Virgin and Capital advertising sales operations are kept separate in the interests of competition.

Capital's group chief executive, David Mansfield, would not comment yesterday on discussions with the MMC.

However, he confirmed that Capital's share of the advertising market would inevitably be one of the main points under scrutiny.

Mr Mansfield added that he expected the Department of Trade and Industry to pronounce on the merger early next year, some weeks later than expected.

Capital already has the biggest share of national radio advertising, with 35 per cent of the market. Virgin has a further 8 per cent.

Chris Evans, the celebrity DJ known as the "ginger whinger", has approached Virgin with a rival bid. Although Mr Evans is believed to be offering less than Capital, he is backed by Apax Partners, the venture capital company, and Virgin said yesterday it was taking the offer "seriously".

A Virgin Radio spokesman said Mr Evans' offer would enable Richard Branson to get a foothold in British television. "The deal with Evans, which we're still not too clear about, involves a merger which would give Branson some control over Ginger [Productions, Mr Evans' broadcasting company]."

Mr Mansfield said he was "not concerned" about the rival bid, and added that Mr Branson had "a lot of respect" for Capital. "He wants to join us round the Capital table," he said.

Capital is unlikely to get into an auction with Mr Evans, and is keen to tie up an exclusive agreement with Virgin in order to foil the DJ's counter offer.

The news coincided with changes to the terms of Capital's offer for Virgin, although Capital denied yesterday that the two events were related. The alterations, prompted by the decline in Capital's share-price, will see Mr Branson's shareholding in the company capped at under 10 per cent, and - although the pounds 87m price remains fixed - more cash than shares will be offered in order to avoid diluting earnings per share.

Mr Mansfield, who became chief executive after Richard Eyre left for ITV Network Centre, yesterday reported headline profit before tax of pounds 35m, up 9.2 per cent. The dividend increased 10 per cent to 13.75p. He said that since the acquisition of the My Kinda Town restaurants business last year, Capital had evolved into a "music-based entertainment company".

He added that the Radio Cafe concept would be expanded, with many more in the London area and one each in Birmingham and Southampton. There is presently just one Radio Cafe in London's Leicester Square. Mr Mansfield sought to assuage City concerns about the expansion into catering with news that the development would be funded by restaurants disposals. Despite this, though, Capital's shares slid 11.5p to 472p.

Evans' bid for Virgin, page 3