Capital Radio Plc and Virgin Radio Holdings Limited: A report on the proposed acquisition

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Summary

This inquiry, the terms of reference for which are set out in Appendix 1.1, con-cerns the proposed merger between Capital Radio plc (Capital) and Virgin Radio Holdings Limited (Virgin Holdings).

Both companies are engaged in commercial radio broadcasting. Capital operates two local commercial radio stations in London, Capital FM and Capital Gold, and a number of local commercial radio stations in Birmingham and Oxford and on the south coast. Virgin Holdings, through its wholly-owned subsidiary Virgin Radio Limited (Virgin), operates one national commercial radio station broadcasting across most of the UK, Virgin AM, and one local commercial radio station, Virgin FM, which broadcasts in the London area.

Commercial radio stations earn revenue through the sale of advertising. For the year ending March 1997, radio accounted for 4.7 per cent of the total spend of almost £6.8 billion (in 1996 prices) on display advertising, which comprises: television, press (exclud-ing classified advertisements), radio, cinema, transport and outdoor.

For the purposes of competition analysis, we believe radio advertising should be regarded as a separate economic market. This is because:

In the light of the above view of the market, we believe the constraint and hence the discipline afforded by the prices offered by other competing radio stations is likely to affect the price of radio advertising more importantly than the prices of other display media.

We also find that there are two separate geographical radio advertising markets affected by the proposed merger: that for local and national advertisers targeting a London audience and that for national advertisers targeting the UK as a whole. Based on 1996 data, the merger will result in Capital's share of the London market increasing from 60.9 to 68.8 per cent and Capital's share of the UK market increasing from 36.8 to 46.0 per cent. Based on data for the first six months of 1997, the respective increases are 58.1 to 65.9 per cent for London and 36.2 to 44.2 per cent for the UK.

We analysed the competition effects in these two geographical markets for radio advertising. Within the London market, we find that the increased market share that Capital will gain from the merger may be expected to increase Capital's already strong position in that market and to diminish competition. We expect this to be characterized by a reduction in the ability of advertisers to assemble effective packages of radio advertising which do not include the Capital and Virgin stations; a weakening of the ability of other stations to compete for revenue; and increased opportunities for Capital to adopt sales practices which may be expected to have detrimental effects on its competitors. As a result, prices may be expected to rise higher than they would in the absence of the merger.

We also think Capital's resulting dominance in the London market would enable it to offer wide-ranging packages of advertising which would strengthen its position in the UK radio advertising market, thereby reducing the ability of advertisers to buy around Capital. As a result, prices may be expected to rise higher than they would in the absence of the merger.

There are three benefits of the merger: first, the development of Virgin AM as a UK-wide station and of Virgin FM as a London-focused station; secondly, increased profes-sionalism and financial strength in the management of Virgin; and thirdly, a greater commit-ment by Capital to the development of digital audio broadcasting (DAB). The first two of these benefits could largely be achieved in the absence of the merger. However, we believe the development of DAB in the UK would be more assured as a result of the merger. Overall, we consider that the benefits are not sufficient to outweigh the detriments we have specified.

We conclude therefore that the proposed merger between Capital and Virgin Holdings may be expected to operate against the public interest with the particular adverse effects set out in paragraphs 1.6 and 1.7.

We recommend that the proposed merger of Capital and Virgin Holdings should only be allowed to proceed if either:

If Capital is not prepared to accept these conditions then we recommend that the proposed merger be prohibited.

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