SCOTLAND: MEDIA INVADERS HEAD SOUTH - SMG has embarked on a shopping spree south of the border, but will this be enough to deter a Granada takeover? Report by Alasdair Reid

By ALASDAIR REID, campaignlive.co.uk, Friday, 19 November 1999 12:00AM

If, by the time you read this, Scottish Media Group has not been bought by Granada, there might be a lot of very worried people in Glasgow. According to many sources north of the border, SMG has gambled on doing a deal by Christmas and, though it has been playing a game of boldly inspired brinkmanship, the end of the runway is approaching with alarming speed. SMG must publish interim financial results in December and there is widespread speculation that the figures might not be universally good news which could give a whole new angle to the group’s strategy.

If, by the time you read this, Scottish Media Group has not been

bought by Granada, there might be a lot of very worried people in

Glasgow. According to many sources north of the border, SMG has gambled

on doing a deal by Christmas and, though it has been playing a game of

boldly inspired brinkmanship, the end of the runway is approaching with

alarming speed. SMG must publish interim financial results in December

and there is widespread speculation that the figures might not be

universally good news which could give a whole new angle to the group’s

strategy.



When both SMG and its fellow Caledonian media owner, Scottish Radio

Holdings, began acquiring properties south of the border earlier this

year, it was portrayed as a romantic adventure - the first invasion from

the north since 1745 and that business with Bonnie Prince Charlie. These

were surely companies that embodied the self-confidence of a new

political era: in the post-devolution environment, with a parliament

sitting in Edinburgh for the first time in almost 300 years, Scottish

companies could take on the world. Or at least the rest of Britain.



The real story - almost certainly in the case of SMG and perhaps also

where SRH is concerned - is less sentimental. For SMG, it all started at

the beginning of the year with speculation that the Mirror Group was

about to sell its long-held 18.6 per cent shareholding in SMG as part of

a new rationalisation strategy. Many believed that Granada would not

only purchase the Mirror stake but move on the whole company. One way or

another, SMG was now ’in play’.



When the independence of high-profile Scottish companies is threatened,

the customary response is to unfurl the standard and march up and down

playing the bagpipes while aiming obscene gestures in a southerly

direction.



Sure enough, back in March, a matter of days before Granada moved in to

snap up the Mirror stake for pounds 110 million, SMG’s chief executive,

Andrew Flanagan, delivered a polite warning. ’Takeover speculation comes

and goes and we are still here,’ he stated. ’We will defend our position

robustly and anyone that wants to bid for us will have to pay a very,

very full price.’



He also announced that he intended to be a buyer rather than a seller,

having amassed a pounds 300 million acquisitions ’war chest’, and that

he would accelerate the diversification policy begun with the pounds 35

million purchase of the outdoor contractor, Primesight, in February. He

had a few months’ grace, Granada having given assurances that it would

make no further move on SMG until September.



On April Fool’s Day, the spending spree got back into gear with the

pounds 5.7 million purchase of the Scottish outdoor company, Baillie,

followed in June with the pounds 22 million acquisition of the cinema ad

sales house, Pearl and Dean. At this point, the City was offering two

(by no means mutually exclusive) readings of SMG strategy.



The first was that, in a time of low inflation, a company which has

grown as large as it possibly can in a mature home market can only seek

to deliver growth by ’international’ acquisition. The other

interpretation was that SMG was in classic defensive mode - making

itself too diversified and cumbersome for a TV-focused operation like

Granada to take on.



Still, many believed that Granada would at the very least up its stake

in September - and some believed that SMG was now all too ready to

sell.



But by the end of August, the call still hadn’t come. On 2 September,

SMG upped the ante, announcing that it was prepared to pay up to pounds

130 million to take control of GMTV, the ITV breakfast- time broadcaster

in which it already has a 20 per cent stake, as do both Granada and

Carlton.



In short, a Scotty dog among the pigeons.



Sara Maclean, the media director of Faulds in Edinburgh, is in no doubt

at all about the signals this sends out. She says: ’SMG initially had

all these ideas about what a nice big fat media company they could

become.



Then they started asking themselves if there wasn’t a quicker way to

make their zillions. And of course there is - by selling out. If you’re

selling out, the thing to do is to hike your sales price as high as you

can and the best way of doing that is through buying lots of

companies.



’But look at what they’ve bought - none of them is in any way a leading

company in its field. The problem is that City analysts know more about

pork bellies than they do about media companies and the strategy has

been successful in building the SMG share price. Granada knows there may

be some disappointing year end figures coming in but, in tabling a GMTV

bid, SMG is telling Granada, ’buy us now or we’ll be out of your

reach.’’



It is a genuine threat. Granada could not swallow both STV/Grampian and

GMTV because it would contravene government rules on concentration of

ownership - Granada would have too great a share of total UK terrestrial

television revenue and would have to sell GMTV at great inconvenience

and cost. But there is no doubt whatsoever that Granada wants the

Scottish ITV stations, even though they only account for 6 per cent of

total ITV revenue. With Granada already controlling the whole of the

north of England, geographical uniformity is at stake here and Granada

certainly wants to underline its position as the most powerful ITV

player. It’s a finely balanced situation. If the SMG strategy is to sell

- and sell at the highest price possible - this is pretty cool

brinkmanship. Of course, not everyone believes that this is the SMG

strategy. Graham Milne, the managing director of CIA Medianetwork’s

Edinburgh office, says he has been swayed by recent statements from

SMG’s Andrew Flanagan that the company’s long-term ambition is to be a

’strong British media company based in Glasgow’. Milne says - and hopes

in his heart - that a sale is not inevitable.



He points in particular to the company’s launch in February of a Sunday

broadsheet sister to its Herald newspaper. The title has struggled to

meet its circulation targets and has benefited from considerable

investment.



’Is that the action of a company just fattening up the calf before

selling?’ Milne asks. However, even he admits that he ’can’t see SMG

staying as it is forever’.



Critics who insist that SMG’s strategy smacks of short-termism point to

the way it has managed its outdoor acquisitions. Nigel Mansell, the

managing director of the outdoor specialist, Concord, states: ’With both

Primesight and Baillie there was much talk about investment but, apart

from a few changes in management personnel, there has been little

evidence of further activity from SMG. There was also a lot of talk

about a one-stop-shop for Scotland but that didn’t really impress anyone

- and how does Primesight fit into that in any case? Compare all of this

with what SRH has done.’



Indeed. SRH, a local publisher and radio contractor with franchises in

Scotland and Northern Ireland, has attracted plaudits for the way it has

systematically bought up regional poster companies - the Scottish

contractor, Trainer, for pounds 27.5 million in March; Bristol-based

Parkin for pounds 8.9 million in April; Birmingham-based Vision for

pounds 15.4 million in May; and Manchester-based Signways for pounds

4.15 million in September - and restructured them into a new company

called Score Outdoor. The company is run by Chris Trainer and senior

roles have been found for the most able managers from the acquired

companies. Observers have been impressed with the results.



SRH may not stay independent forever - and Clear Channel International,

which owns a similar mix of radio and outdoor interests in the US, has

already expressed a desire to acquire a stake in the company - but the

market believes that the company has a viable short-to-medium-term

strategy.



It is far less convinced about SMG. Many in the City believe Granada

will call SMG’s bluff and hold out in the hope that the SMG share price

will slide; yet others point to the fact that it ’indemnified’ Mirror

Group for a year - if a large chunk of SMG shares is traded at a price

above that paid initially by Granada (900 pence), it must pay the

difference to Mirror Group. Lorna Tilbian, a media analyst with West LB

Panmure, predicts a sale some time after the indemnification period is

up in March.



She says: ’Despite valiant efforts to stay the executioner’s hand, the

die is now cast. In its desperation to expand, SMG has been forced to

buy into areas that are neither akin geographically nor in its existing

core business areas. And given the poor recent performance of the

outdoor market, buying Primesight at the top of the cycle was probably

none too clever.’



But is it as simple as that? What about bagpipes, rude gestures and the

political dimension? The advertising community in Scotland appears split

right down the middle on this one, and the market is alive with

conspiracy theories. Some argue that a Granada takeover will not change

by one iota the television market dominance enjoyed by STV/Grampian

north of the border. One source reckons that a takeover by Granada could

actually be an improvement, stating: ’SMG has already ended Grampian’s

existence in production terms and it has moved all the production it can

down to London. SMG has done absolutely nothing for the Scottish media

industry. If Granada came in, it would be asked to make promises that

would be worth ten times what SMG has done for the industry here.’



Conspiracy theorists believe that SMG has already smoothed the political

path to a sale. Its chairman up until this summer was the Transport

Minister, Lord Macdonald of Tradeston, formerly known as simply Gus

Macdonald, a man whose first media success came as a producer of

Granada’s World in Action. Macdonald ensured that powers over media

matters were not devolved to the new Scottish Parliament and it is

assumed by some that he will guarantee the silence of the Scottish

Labour Party - both in Edinburgh and London - if the sale goes through.

The issue certainly won’t be covered by STV, which has a dominant share

of mind north of the border. You won’t find it in the Herald’s

editorials either.



A stitch up? Well, perhaps Milne does not agree with any of the above -

and he is not alone. He says: ’There are good business reasons why I

don’t believe a Granada takeover would be a good idea. For instance if

it started selling a north British macro region, that would push up the

price of airtime in Scotland. And what would happen to the Herald

newspapers?



They would be sold on by Granada, which has no interest in

publishing.



But who to? That also is a worry. Granada would strip out all of the

senior management functions which would make it hard for people north of

the border to have the best possible access to decision-making.



’But it also comes down to the fact that we like to believe we are

capable of running our own media, marketing and advertising business in

Scotland.



There will be a lot of people who would not be at all happy about a

Granada takeover and the fact that they would have no political say via

(the Scottish) Parliament will just make them shout all the louder.’





SCOTTISH MEDIA GROUP



Formed when STV acquired Caledonian Publishing in 1996



ITV franchises: Scottish Television, Grampian Television (acquired for

pounds 105 million in 1997), S2 (digital channel, Scotland’s equivalent

of ITV2).



Newspapers: west of Scotland titles, The Herald (circulation 105,000),

the Sunday Herald (47,000) and the Evening Standard (122,000)



Outdoor: Primesight Advertising has 5,700 sites across the UK, mainly

backlit 6-sheets; Baillie has 357 48-sheet sites and 367 6-sheet sites

in Scotland.



Cinema: Pearl and Dean, which commands 30 per cent of UK cinema screens,

25 per cent of cinema ad revenue.



Leisure: 20 per cent stake (acquired in September) in Heart of

Midlothian Football Club.



Magazines: Through subsidiary Caledonian Magazines. Titles include The

Home Show.



New Media: Internet publishing through Delphic Interactive.





SCOTTISH RADIO HOLDINGS



Commercial radio franchises: Radio Forth, Radio Tay, Radio Clyde,

Northsound, Moray Firth Radio, Radio Borders, Westsound, Downtown.



Outdoor: Score Outdoor is a new operating company merging the interests

of the Trainer, Vision, Parkin and Signways regional posters contractors

which were purchased this year.



Publishing: Score Press owns 33 local newspapers in Scotland and Ireland

run under separate divisions, including: Montrose Review, Bute

Newspapers and The Black Country Bugle. The Leitrim Observer Group,

bought for 860,000, was added in October.



This article was first published on campaignlive.co.uk

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