Guardian Media Group yesterday confirmed its interest in buying Capital Radio as it signalled that it was determined to pull off a major acquisition to make it a leading player in the radio sector.
Capital Radio shares closed up 11 per cent at 490p, valuing the company at £403m, though analysts said that GMG, owner of The Guardian newspaper, would have to pay £500m or £550m to secure it. John Myers, who runs GMG's radio business, said Capital was an attractive target but added that no decision had been made on whether to bid for it yet.
He said: "We are looking at all the big groups and running the rule over them. Of course Capital is one of these. That doesn't mean we've settled on one company."
GMG has about £120m of cash and no debt. Mr Myers said the company was "quite able" to raise the funds necessary for a large radio acquisition.
"The market will come down to three or four players in the UK and we want to be one of them.... Clearly that means that we have to acquire as well as win licences. To get to the top three, we would have to invest substantial sums," he said.
GMG's focus on Capital and the radio sector follows a brain-storming session held by company management a week ago in Glasgow. The company had planned to spend about £500m buying out its co-owner in the Autotrader business, BC Partners, but that deal appears to have turned sour.
Analysts said Capital was the obvious bid target, as it is the market leader, it is a pure radio group and has no blocking shareholder. Emap, one of the two other big groups, also has a large magazine business, while GWR has a 29 per cent stake held by Daily Mail & General Trust.
GMG is currently a minor player in radio and it relies on another operator to sell its advertising. Over the last two years it has spent about £70m buying Scot FM and Jazz FM. That means it will not have major regulatory problems acquiring a major radio group and it can move ahead of new legislation in the Communications Bill, now passing through parliament. This will liberalise the radio ownership rules, allowing mergers among the big players and permit non-European groups to buy stations for the first time.
Mr Myers said: "By and large, we don't have to wait for the Bill. But that doesn't mean to say that we'll rush out and do a deal tomorrow."
Capital is still the UK market leader, with a 15.2 per cent share of the adult commercial audience, compared with 12.5 per cent for GWR, 12.1 per cent at Emap and 9.9 per cent for Chrysalis. However, Capital's flagship 95.8 FM London station has recently lost substantial numbers of listeners, dropping below 10 per cent of the London market, and many believe the company is in structural decline.
Richard Menzies-Gow, analyst at Dresdner Kleinwort Wasserstein, said: "Capital would instantly give them [GMG] a big infrastructure and a big position with advertisers but they would also get all Capital's problems."