Profit warnings take shine off GWR/Capital merger

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The Independent Online

Capital Radio and GWR saw £45m wiped off their combined stock market values yesterday as investors digested details of their proposed merger alongside trading updates published simultaneously by both companies.

GWR shares fell 8.4 per cent as it said revenues in the first half of the year would be up 3 per cent compared with 6 per cent expected by analysts. Capital shares fell 3.8 per cent after reporting full-year revenues up 4 per cent but warned it was "cautious" for sales in the upcoming October-December period.

"It's two profit warnings and a merger," Lorna Tilbian, a media analyst at Numis Securities, said. However, she said in terms of the merger it was a "dream deal" for UK radio.

The merger will bring together GWR's local radio assets plus its Classic FM national radio station with Capital's assets, notably its London 95.8FM station.

Advertisers were cool about the deal. The chief executive of one leading media buying agency said it was unlikely to result in higher prices being charged for airtime.

Shareholders in the two companies said they expected the merger to win approval, although they questioned the management structure. This involves David Mansfield, the chief executive of Capital, assuming the same role in the merged group, while Ralph Bernard, his opposite number at GWR, will be given the job of executive chairman after the merger. This is in breach of the Combined Code on corporate governance best practice. One leading institution, which asked not to be named, said: "In principle, it would be ideal to have an independent chairman but we recognise the special circumstances in which this deal is taking place."

The shareholder said the issue of management positions was one of corporate governance but not a deal-breaker as was the case with ITV. Shareholders in the merged Carlton and Granada business blocked the appointment of Carlton's Michael Green as chairman on the basis that his poor working relationship with Charles Allen, the chief executive of Granada, would destroy value in the merged group.

"In this case there aren't the same misgivings," the shareholder said.

However, in the wake of the poor trading statements, other shareholders warned that the management team of Mr Mansfield and Mr Bernard would have to rapidly prove their ability to deliver rising profits in the expected advertising recovery if they were to survive long. One investor said: "As a big shareholder you might say 'it's feet to the fire and we'll deal with that [the management issue] in 18 months'."

Mr Bernard, explaining the decision to maintain a chief executive and executive chairman, said: "There is a clear division of responsibilities between myself and David [Mansfield]. This is a merger of equals which still has a long way to go. You're not looking at an established business that's mature. Part of it is still developing which is the analogue radio business, and part of it is nascent but shortly to experience explosive growth which is the digital radio business. David's skills in operating and running a business are going to be critical to the success and profitability of the company."

A referral to the Competition Commission is assumed by most observers to be inevitable. This means completion is unlikely to be until summer next year, and possibly even in 12 months' time.

But despite that, the terms of the deal are locked even if trading at the two companies diverges materially in the meantime. Under the agreement, Capital shareholders will own 52 per cent of the enlarged group while GWR will get 48 per cent.

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