GWR could make waves on back of merger talks

Ride out Monsoon's tempest; Hold Wolverhampton & Dudley

GWR, owner of Classic FM, is one of the leading radio players that are now expected to enter into a feverish round of consolidation, following the publication of the draft Communications Bill.

Its full-year results yesterday were overshadowed by a report that it had held informal merger talks with Capital Radio. The shares rose 7.6 per cent to 276.5p. However, GWR stated that it is not in merger talks with any party and the main reason for the share-price rise seems to be news it delivered elsewhere.

The company, which has interests in Europe and Australia, said it would focus on just the UK. Although GWR's loss of interest in Europe was known, the Australian move was new and welcomed. GWR is to divest its 25 per cent interest in DMGT Australia, rather than pay – as expected – to acquire the rest of this business. This will help tackle GWR's substantial £160m debt burden.

For the year ended 31 March, pre-tax profits before goodwill and exceptionals crashed 63 per cent to £7.7m. Along with the rest of the industry, GWR as been through a "brutally difficult year" because of the severe downturn in advertising revenues.

Over the last two or three months however, there have been signs of improvement. Although some of this may be down to the knock-on benefit of the football World Cup, the company now seems to be expecting a reasonably strong recovery.

Analysts expected the current year to produce pre-tax profits of £13.5m. That puts the stock on a rather inflated forward rating of 39 times earnings. This makes sense in the context of the cyclical recovery, which has been priced in, together with a bid premium. Some suggest that a takeover price could go as high as 400p or 500p a share.

However, much depends on Daily Mail & General Trust, the newspaper group that owns about 27 per cent of GWR. Any deal would require DMGT to co-operate. Yet it is not clear whether DMGT plans to sell out to a third party or gobble GWR itself. The new media law could make a GWR-DMGT deal possible, though it may require disposals in some areas where DMGT's local newspaper interests overlaps with GWR's local radio stations. Worth hanging in there.

Ride out Monsoon's tempest

Investors who piled into Monsoon when it listed in February 1998 have had a tempestuous time if they have stuck with the high street store best known for its floaty prints and beaded accessories.

Having entered the market at 198p, the stock then lost more than half of its value, only to climb back up to the 130p mark after a strong run in the shares since the end of last year.

Yesterday the company said it is likely to make at least a £31m profit this year, compared with analysts' forecasts of about £27m. The news nudged its shares 2.5p higher to 135.5p.

After four years as a quoted company, Monsoon is showing signs of being a viable competitor to the high street veterans. It has managed a 12 per cent increase in like-for-like sales this year. This is partly due to the general frenzy of consumer buying but also because it has made some key management changes, including bringing in Rose Foster, who spent 18 years at Next and then worked at New Look, to manage its UK business.

Most UK retailers have at least an eye on foreign markets because the domestic market is so competitive. One advantage Monsoon has is that its Accessorize chain appears to be more easily translatable abroad than straight clothing businesses, where fashions vary more.

Monsoon is set to make earnings of 12p a share this year, putting it on the undemanding forward p/e multiple of 10. Monsoon is an illiquid stock – 75 per cent of the company is controlled by its management – and its shares have a lot further to go even to reach its IPO price. Hold.

Hold Wolverhampton & Dudley

Wolverhampton & Dudley, the pubs and brewery group, seems to have done a lot right since it narrowly beat off a hostile takeover bid last August. The protracted bid saga culminated in a 513p a share offer from Pubmaster. As the company reported interim results yesterday, its shares stood at 702.5p.

The company improved its return of capital programme from £100m to £126m yesterday but that is still well short of the £200m talked about at the time of the bid. Wolves said the rest of the money may be needed for investment in the business and acquisitions, as the pubs sector continues to consolidate.

Wolves has been improving its performance and the shares have responded accordingly. It has been doing all the obvious stuff: addressing margins and getting rid of underperforming assets. Since April 2001, 120 pubs and sites have been sold. What it hasn't resolved is its Pitcher & Piano chain of 33 pubs, which it tried but failed to sell.

Pre-tax profit, for the six months to 30 March, edged up 2 per cent to £31.3m. Teather & Greenwood, the broker, is looking for full-year earnings of £74m, or 63.4p a share, putting the stock on a forward multiple of 11, which is not cheap. Hold.