SMG's chances of holding on to Virgin Radio were dealt a body blow yesterday as the ailing subsidiary reported a sharp drop in operating profits in 2004.
The group has already rebuffed two pounds-100m takeover approaches for the Londonbased station from media mogul, Lord Waheed Alli, saying the bid "seriously undervalued" the station and its prospects.
SMG, which is based in Glasgow and also owns Scottish and Grampian TV, bought Virgin Radio and Ginger Group, formed by the DJ Chris Evans, for pounds-225m in 1999. Since that time profits and audience figures have crumbled at the station.
Virgin Radio accounted for most of Ginger Group's pounds-16m operating profit in the year to July 31, 1999, when revenues were pounds-46.4m.
Yesterday, SMG revealed the radio station's operating profit has slumped to just pounds-4.3m, compared with pounds-7.3m the previous year, and was worse than the City was expecting. Turnover also fell to pounds-20.1m from pounds-23.2m in 2003.
A source close to the Alli camp last night observed: "This business desperately needs the management focus we can give it."
George Watt, finance director of SMG, said Alli's takeover proposal forVirgin Radio was "discussed by the board", but the board decided "it seriously undervalued the business".
Pressed on whether this was the correct decision, given Virgin Radio's continued poor performance, Watt replied: "Yes, when it (the bid) has significantly undervalued the business."
His comments came as SMG posted a 9-per cent hike in full-year underlying pre-tax profit to pounds-17.5m, compared with pounds-16m in 2003.
In addition, SMG said the gross pension deficit - calculated under the accounting standard FRS17 - in its two schemes had widened to pounds-100.2m in 2004, compared with pounds-91.7m a year earlier.
The schemes (the Scottish and Grampian Television Retirement Benefit Scheme, and the Caledonian Publishing Pension Scheme) have about 5000 members between them.
Watt brushed aside any concerns about the state of the pension schemes, saying: "Whilst yes, you have an accounting deficit, there is certainly no concern there."
Since SMG rejected Alli's overtures, the Labour peer has met with some of the Scottish company's biggest shareholders, including ITV, which owns 17-per cent, and Fidelity, which has 10-per cent.
It is understood that neither shareholder has yet rebuffed Alli's proposals, but both are thought to want more cash for Virgin.
ITV has a watchful eye on SMG's Scottish and Grampian TV franchises, the major part of the commercial broadcast network not already owned by ITV.
However, any takeover of the Scottish franchises by ITV is thought to be more of a longerterm aim.
Watt rejected suggestions by the Alli camp that SMG's management of Virgin Radio has been poor, despite admitting to losing around 38.5-per cent of its total audience between March 2000 and the fourth quarter of 2004.
He defended SMG's stewardship, noting that London-based rival, Capital Radio, had also lost 45.8-per cent of its audience over the same period.
Watt added: "Relative to the rest of the commercial sector, the comparatives stand up rather well."
The group's finance chief also noted that Virgin Radio's prospects have improved this year, with first-quarter advertising revenues up by 8-per cent.
City brokerage, Numis, said in a research note to clients:
"Looking forwards, SMG has started the year well.
"However, we believe that first-quarter strength will be offset by a weak second quarter due to the timing of Easter, the general election and the (comparative) absence of Euro 2004 (last year's football championship) ."
Elsewhere in the group, SMG notched up a stronger performance in its television business, with Scottish and Grampian TV growing advertising revenues by 8-per cent in the year. This was a better performance than both ITV as a whole, which grew 3-per cent, and the commercial television market, which grew at 6-per cent.
The group cut its net debt from pounds-242.5m to pounds-134.8m, helped by the sale of its minority stake in Scottish Radio Holdings and that of GMTV.
The total dividend was held at 2.5p. Shares in the group firmed 1.5p to close at 110p.
FACT FILE 2004* 2003
TURNOVER** pounds-201.2m pounds-188.2m
PRE-TAX PROFIT** pounds-17.5m pounds-16m
DIVIDEND 2.5p 2.5p * Full-year figures
**Continuing operations
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